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CONTENTS

Acknowledgments
Introduction

1 Jesse Livermore
Its not the thinking that makes the money; its the sitting.

2 Bernard Baruch
even being right three or four times out often should yield a person a fortune
if he has the sense to cut his losses quickly

3 Gerald M. Loeb
What everybody else knows is not worth knowing.

4 Nicolas Darvas
As for good stocks and bad stocks, there were no such things; there were only
stocks increasing in price and stocks declining in price.

5 William J. ONeil
with persistence and hard work anything is possible. You can do it, and your
own determination to succeed is the most important element.

6 Strategies of the Greatest Traders

Conclusion

Bibliography/Resources

Index
ACKNOWLEDGMENTS

To my wife, Gina, for her understanding and support. To my five-year-old daughter,


Daniella. It was a joy to have you by my side, and I thank you for allowing me to share
the computer (mine) with you throughout this project.
To a few great friends and my parents for providing continued encouragement.
To the professional staff at McGraw-Hill, especially my fine editor Kelli
Christiansen.
Finally, to Mr. William ONeil. This book would never have been written without
the accomplishments he has achieved, especially his dedicated efforts to bring relevant,
fact-based, quality market information to the individual investor.
INTRODUCTION

Lessons from the Greatest Stock Traders of All Time is about incredible achievements.
It profiles five individuals who attained great levels of success in one of the most
difficult endeavorstrading stocks. Although many people make substantial profits and
attain some success trading stocks (while most do not), the people described in this
book are standout achievers.
They are the greatest because they all achieved (and one is still achieving)
enormous success across decades. They paved new ways in stock market success and
have stood the test of time. And when the test of time involves the stock market, that
makes the achievement that much more impressive.
Who are these people and how did they get to be distinguished as the greatest? They
are all Wall Street legends, and each one published at least one book describing his
successful trading strategies. Here is a preview.

Jesse LivermoreThe reclusive, private genius whose revolutionary trading


strategies are still being used today. Livermore attained incredible wealth and
gave it back many times, eventually falling victim to his own personal problems
and severe depression.
Bernard BaruchThe intelligent, sophisticated financier whose trading success
earned him great riches and entry into successful financial dealings, and then into
public service with the nations highest levels of power.
Gerald M. LoebThe financial writer, stockbroker, and skittish trader who made
millions for more than half a century, battling the market by staying disciplined
to his strict trading rules.
Nicolas DarvasThe outsider whose almost accidental initial first success in
stocks led him on a quest of sheer determination to succeed in stock trading.
After many years of trial and error, perseverance never wavering, his efforts
finally paid off in millions and landed him a feature story in Time magazine.
William J. ONeilThe factual, hard-working researcher whose never-ending,
detailed study and disciplined trading rules led to fortunes in stock trading. Then,
by using his trading profits, he launched successful investment research
information businesses serving both professional and individual investors.
Stock trading attracts many people because its easy to try, and many view it as an
easy and quick way to riches. But as the majority learn, most the hard way, its not as
easy at it seems. The stock market is an interesting display of expectations and
emotions. Its by looking under the surface and past the daily minor market fluctuations,
delving into the details, that these leaders studied and discovered the methods that
really worked. This required intense observation and study to succeed at the highest
levels, just as any other vocation requires the same attention and hard work to attain
great success. This, though, is also where most people fail and do not give adequate
attention and effort. As these great traders observed through experience, the stock
market is not obvious; it is designed to fool most of the people most of the time.
Every new market cycle always brings out new so-called experts who tout new
strategies to try to succeed in the battle of the market. New books are written, new
newsletters are printed, and new Web sties tout newfound secrets and supposedly new
ways to succeed in the market. However, few survive very long and are gone before we
ever get to see a sustained track record of success. And just like any other field such as
sports, music, business, medicine, art, etc., there are the few who excel above all
others. Its no different when it comes to the stock market. Just like anything worth
pursuing in life, it takes hard work and dedication to be able to achieve the highest
levels possible.
Lessons from the Greatest Stock Traders of All Time covers these five successful
traders, spanning the past century. If we add up all of the years these experts traded in
the markets, we cover periods of approximately 1892-1940 (Jesse Livermore), 1897-
1930s (Bernard Baruch, when he was most active in the market), 19211970s (Gerald
M. Loeb), 1952-1960s (Nicolas Darvas), and 1960-present (William J. ONeil). All
told, these time frames cover every year of the market for more than 100 years of
organized stock trading through all types of stock market cycles. See, for example,
Figure I-1.
Figure I-1
Each period offered different market environments, such as strong bull markets and
deep bear markets. As a result, there are lessons to learn from these masters that relate
to just about every market condition. The strategies they employed were very similar to
each other, no matter what time period they traded in. Chapter 6 summarizes the
incredible commonalities in their methods, disciplines, and rules. These traders
discovered, through their own mistakes and experiences, some common conclusions in
the basic strategies and principles that eventually led them to succeed beyond most
others in the stock market.
By measuring similarities with the different periods of the market, we prove one
very important point concerning the stock market. As the market goes either up or down
year after year and business cycle after business cycle, the elements that drive it never
really change that much. Why? Because human nature rarely changes. And even though
millions of people are involved in the market every day, there are only a handful of
human traits that play in the market no matter what day, year, or decade it is. Those
human traits include fear, greed, hope, and ignorance. And human nature has a huge
impact on the market. After all, the market is consistently comprised of opinions of
many different people and market professionals.
A famous observation from Jesse Livermore was, There is nothing new on Wall
Street or in stock speculation. What has happened in the past will happen again and
again and again. This is because human nature does not change, and it is human emotion
that always gets in the way of human intelligence.
So, whether its 1929 or 1999 or 2029, the market is influenced most by human
nature and the human opinions and expectations of future profit potential. Its mastering
the human nature element of the market that separates the minority of people who are
successful in stock trading from the vast majority of the unsuccessful stock traders.
The names featured in this book are legends on Wall Street. Jesse Livermore and
Bernard Baruch were famous during the beginning of the twentieth century. They set
new rules and precedents that led them to incredible success and wealth. Though Jesse
Livermore experienced many setbacks and hardships along the way, he was truly a
market genius and attained both a vast fortune and great personal achievements. He
socialized with people at the highest levels of success in the business world. And he
has been considered the best trader ever by numerous people over the years.
Bernard Baruchs successes in stock trading led him to great fortune in the business
world. He also became a legend as a financier and then enjoyed a successful venture
into politics, as he helped draft the treaty of peace and served as the Chairman of the
War Industries Board for President Woodrow Wilson during World War I.
Gerald M. Loeb was also a legend on Wall Street, though he traveled a quieter
road. He managed to amass millions during a career spanning more than 50 years in the
battlefield of trading stocks in the marketplace, as well as being a successful
stockbroker and financial writer. He also had to compete against the godfather of value
investing, Benjamin Graham, as Grahams classic Security Analysis hit the bookshelves
about the same time in 1935 as Loebs classic The Battle for Investment Survival. The
two differing styles of investing competed against each other as Graham advocated the
buy and hold strategy and Loeb touted his skittish trading style as the most plausible
way to succeed in the stock market and realize substantial profits.
Nicolas Darvass successful Darvas Method grabbed national attention when his
story was featured in Time magazine and his self-authored story How I Made
$2,000,000 in the Stock Market became a national bestseller when it was published in
1960. Darvass experience proves to all aspiring traders that anyone, even those not
directly involved in the securities business, can reap the monetary rewards of the stock
market if they put forth the required efforts.
William J. ONeil is the great modern-day success story. ONeil built his fortune
trading stocks and then funneled his profitable winnings into successful businesses
supporting the investment world. His ventures, William ONeil & Co. serving the
institutional investment houses and Investors Business Daily catering to the individual
investor, are mainstays. They are respected in todays world as reliable research and
investor information sources. ONeils CAN SLIM method has become a favorite of
many individual investors.
Numerous publications about these great traders detail their own stories and
strategies. Some have become bestsellers, and most reside in serious stock traders
personal libraries, oft regarded as investment classics. This book references many of
these published works by and about these great traders. I highly encourage you to read
each of their stories for a more detailed look into the lives and trading strategies of
these great stock traders. More information about the publications that focus on these
five traders can be found in the resources section at the back of this book.
The experiences of the greatest stock traders of all time can teach us many lessons.
After all, who better to learn from, in any endeavor, than the ones who attained the
highest levels after experiencing all the mistakes, trials, and tribulations, and then
formulating winning strategies to overcome them?
So lets begin to profile these great stock traders and find out what separates them
from the majority when it comes to the stock market. We will discover how adhering to
the strict rules requiring discipline, patience, hard work, and persistence can pay huge
rewards. I think you will find these similarities very interesting and, with dedication,
by learning from the greats, you too can develop your own rules to go along with the
basic time-tested strategies in this book. Perhaps someday in the future you can add
your name to the distinguished list of The Greatest Stock Traders of All Time.
1
Jesse Livermore

Its not the thinking that makes the money; its the sitting.

The Reclusive Genius

Jesse Livermore was born on July 26, 1877 in Massachusetts. He came from a poor
family, as his father struggled as a farmer with the challenging New England soil.
Young Jesse knew he wanted more from life, and when his father pulled him out of
school to follow in his footsteps, Jesse ran away from home at the age of 14. With just a
few dollars in his pocketgiven to him by his motherhe headed to Boston. He
landed a job as a chalkboard boy for Payne Webber that paid him the minimal wage of
$6 per week. His responsibilities in his new job required him to post the stock quotes
on big chalkboards covering the length of the brokerage house as prices were called out
by tape watchers sitting in the gallery as fast as they could yell them out from the ticker
tape machines.
Livermore always excelled at mathematics in school, and he found the tape of the
Street to be his calling. He was truly gifted, with a photographic memory when it came
to numbers. He actually performed three years of mathematics in one year of school
during his youth. He would memorize prices and ticker symbols from his job at Payne
Webber. He became a voracious tape reader and watched the tape with total
concentration and focus. He also started to keep a notebook of the numbers from his
chalkboard job, and he soon noticed that certain patterns emerged. He would keep
thousands of price changes in this notebook diary and study them, looking for these
certain price patterns. By the time Livermore was 15, he was seriously studying stock
patterns and price changes. His on the job training allowed him to be ever observant
of the activities and how people participated in the market. He noticed that most people
lost money in the stock market because they acted randomly, did not act on rules or a
predefined plan, and did not put forth the required study that the market and its actions
required.
His first trade was made jointly with a friend. They invested a total of $5 in
Burlington because Livermores friend thought the stock would rise. They executed the
trade with one of the bucket shops in Boston. The atmosphere within the shops was
more conducive to low-budget speculation, as one was basically betting on the next
move of the stock, or very short term trading. You could also bet on the movement of the
stock without actually owning the stock certificates. If the stock moved against you by
10 percent, your trade was wiped out. This was the 10-percent margin rule that was in
effect at the time, and it would establish a strict loss-cutting rule for Livermore that he
adhered to most of the time during his trading career. Over time and due to experience,
he would actually improve on this and he would be able to cut his losses to less than 10
percent.
Concerning Burlington, Livermore first checked his notebook and became
convinced that the stock would rise based on its recent trading pattern. So his first stock
trade took place when he was 15, and he ended up making a profit of $3.12 on his share
of the trade.
He continued to trade in the bucket shops, and by the time he was 16 he was making
more money trading than he was making at his job with Payne Webber. When he made a
total of $1000 he quit his job to trade full time in the bucket shops.
Livermore made so much money by the time he was 20 that he was banned from the
bucket shops of Boston and New York, as he was having an adverse effect on the shop
owners profits. (He would bounce back and forth between the two cities when he
would be discovered in one or the other.) His success earned him the nickname The
Boy Plunger. Bucket shop owners wanted nothing to do with him, or his winning
trades, which were constantly taking profits from their shops.
With his confidence high he decided to head to New York and trade the stocks on
the listed New York Stock Exchange. After all, this was the big time and he was now
ready to test his skills in the big league. He set up an account with a brokerage office
with $2500 he had as his capital stake. This was down from a high of $10,000 he had
attained at one time from his bucket shop trades.
As he lost his profits, Livermore learned the hard way that trading wasnt always
easy. As a result, he started to analyze the mistakes he made that caused his losses. This
detailed analysis of past mistakes would prove to be a vital trait of his later success.
This also became one of his best learning tools.
One of the lessons he discovered during this first analysis period was he would
become impatient and thought he had to trade. Impatience in the market usually leads
one to making impulse trades, which rarely leads to profitable success. This mistake
would cost him dearly, and it is a mistake made by many traders still today.
New York did not produce much success for Livermore. He went broke within six
months and had to borrow $500 from his brokerage firm. With money in hand he headed
back to the bucket shops to regain his stake. He discovered that the bucket shops would
quote prices instantaneously, whereas there was a delay in the New York quotes. His
system at the time was based on instant quotes and quick trades. He returned to New
York in two days with $2800 and repaid the $500 loan to the brokerage firm.
But upon his return he found it more difficult than he had expected and still found he
was only able to break even in New York, so he returned for a final time to the bucket
shops. Just when Livermore successfully brought his account up to $10,000 by trading
in disguise, the bucket shop owners finally discovered him again and he was banned for
good from the shops.
In 1901, now in New York and trading stocks listed on The New York Stock
Exchange during a strong bull market, Livermore went long (bought) on Northern
Pacific, and he turned his $10,000 into $50,000. Then just as quickly, he gave it all
back on two short positions (borrowing stock from your broker in hopes of buying it
back at a lower price and profiting from the difference), as he thought the market would
break for a short time. Though he lost on these two trades, he was initially right, but the
delays due to the huge volume in trying to fill the trades caused his losses when the
stocks reversed on him.
It was from this experience that he learned how difficult very short term trading was
going to be on The Big Board. Livermore realized he had to learn how to adapt to the
different trading environment that separated the instantaneous action of the bucket shops
when compared to the more sophisticated processes of organized trading. So once
again, by the spring of 1901, Livermore found himself broke. He then discovered a new
hybrid bucket shop that had opened for business. He thought he could regain his stake
quickly if he traded in these hybrids. For almost a year he successfully regained his
capital until he was discovered and banned from these shops as well.
Through it all, the losses Livermore endured taught him that one must experience
losing real money in order to learn the correct ways of the market. He stayed persistent
in his pursuit of success and kept learning from his mistakes and experience.
It was also at this time that he discovered the time element. The time element in
stock trading means that it takes patience, and the road to profitable trading will occur
over time, as in trying to master most pursuits. It can also mean understanding how
stocks trade. In the bucket shops, the time element was very short and instant, due to the
more gambling nature of how the bucket shops were set up and how they operated. In
New York the time element meant there was more of a delay as opposed to instant
transactions. There was also the fact that once you purchased a stock on The Big Board,
you actually took possession of the certificates reflecting the company in which you
owned the stock. This time difference between how the bucket shops operated and how
The Big Board operated meant one had to react more to future time. This required
patience, which would become a strong trait of Livermores years later and would lead
to some of his largest gains. The time element also proved to him that the road to
success in stock speculation was indeed going to happen over an extended period of
time. It would not happen overnight.
He was certain of this because he had already experienced many ups and downs
when it came to his own capital. He achieved some milestones early on. By the age of
15, he made his first $1000. Before turning 21 he made his first $10,000. He got his
account up to $50,000, and then gave it all back two days later. He was experiencing
the usual ways of the market, but he was determined to stay persistent, as he knew the
life of the market was to be his calling.
Livermore made a definition at this point. He defined gambling as anticipating the
market, which was very difficult to do, and he saw the odds as being stacked against the
individual trader. He defined speculating as having the ability to be patient and react
only when market conditions give you the signals to speculate. Here in his early years,
he was constantly learning new skills required to achieve great success in the market.
He kept refining his rules as he stayed observant and persistent.
Livermore was, at this time, by no means an expert. He kept listening to others and
their so-called tips. He also kept trading too much. Another mistake he was making
was taking his profitsespecially in a bull marketway too early. At this time he also
discovered the importance of the general market and how important it was to learn and
understand what the market is doing overall and how it affects most stocks. He had to
learn how to interpret what the market was currently doing and at what stage it was
currently in, instead of trying to predict what it was going to do in the future.
During these early years Livermore was in a constant learning mode. He discovered
that being impatient in the stock market is one of the biggest mistakes one can make.
Through experience he would learn to trust the faith in his own judgment. His constant
observations would lend credence to his judgment and not allow him to be distracted
by the minor fluctuations that would always occur in the market.
Through experience, his strategies began to work and, at age 30, he was becoming
more successful in his trading. At this time he developed his probing strategy
(discussed in more detail later in this chapter). The other key strategy he implemented
was his pyramiding strategy.
Pyramiding was a strategy that would also become a key trading rule of all the other
great traders profiled in this book as well. Pyramiding was buying more of a stock as it
kept advancing in price. Imagine how different this strategy must have seemed in those
early years, as most people are taught to purchase things at lower prices in order to get
a bargain, as opposed to paying higher prices. This concept of adding to your most
recent purchases when they prove you were right compounds your returns. Livermore
discovered that after he would purchase a stock from observing its price action, if the
stock kept increasing in price, the action of the stock was proving to him that he had
made the right decision. This confirmation of his correct decision was proof enough for
him to continue purchasing more of the stock. This compounding effect would only add
more to his increasing gains on those particular stocks.
Livermore used probing and pyramiding strategies on the short side of the market in
late 1906, as the market was having difficulty keeping a sustained rally in an upward
trend. Here he would add more to his short positions as a weak stock kept declining in
price. He had so much success being short in the market during the beginning stages of
the bear market of 1907, that he had become a millionaire before he turned 31.
Livermore called the crash of 1907 and made $3 million in a single day on October
24th, as he closed out and covered his short positions. In October 1907, J.P. Morgan,
then the most influential person on the financial scene, saved Wall Street from near
collapse as he injected the market with the required liquidity needed to continue as a
viable institution. Morgan even sent a personal message directly to Livermore
requesting that he stop shorting the market. The fact that the great J.P. Morgan
acknowledged Livermores action in the market was a true testament to the reputation
and impact that Livermore was gaining on the street.

The Great Bear of Wall Street

By this time, Jesse Livermore was indeed establishing himself as a prominent figure on
Wall Street. His newfound wealth made Livermore discover that the big money was
made in the big swings of the market, earning the nickname The Great Bear of Wall
Street from his shorting positions that earned him a fortune in the crash of 1907.
Throughout these winning years, Livermore reiterated his belief in never-ending stock
market analysis and its essential importance to success.
From his successes in the stock market, he began to speculate in the commodities
market as well. He became involved with Percy Thomas, who was considered, at that
time, the Cotton King. At the time he started socializing with Thomas, Thomas had lost
all of his fortune on a few bad trades. But Livermore listened nonetheless, as he knew
of Thomass prior success and that he was still considered the legend of cotton. Thomas
convinced Livermore to take a certain position in cotton. As Livermore soon found out,
his long position in cotton would cost him nearly his total fortune. He lost many of the
millions he had built up on his profitable trades with this transaction on cottonlargely
by breaking many of the market rules he spent so much of his early years developing.
Livermore broke his own rules of playing a lone hand and not listening to others.
He also broke his loss-cutting rule, as he kept holding on to a losing position. This
experience cost him emotionally as well. As he tried to get his money back, he lost
even more money in desperate trading. By this point, Livermore was now deeply in
debt to many creditors. This only furthered his depression and he began to lose his
confidence, which is devastating to a stock trader.
It took many years for Livermore to get back to his winning ways. The markets were
mostly flat to down in the years from 1910 through 1914 (the market was actually
closed from August 1914 to mid-December 1914 due to the beginning of World War I).
Livermore, at this time, was broke, depressed, and owed creditors more than $1
million. The market also offered no great opportunities during these flat years. In order
to clear to his head and get back into his game, he decided to declare bankruptcy in
1914. Still down on his luck, in 1915 during a war-time rally in the market, he was
given a line of 500 shares with an unlimited price per share from one of the brokerage
houses he traded with. For six weeks he did nothing but study the market and watch the
tape. He noticed that certain par levels would be established by a stock. This was an
old trading principle that he actually used in his bucket shop trading days. A par level
would mean that when a stock rose to a round number such as $100 or $200 per share,
it more than likely would keep increasing in price as it cleared this par level.
He bought Bethlehem Steel at $98 and watched it passed through $100 and kept
rising. He bought another 500 shares as it hit $114 per share. The next day it hit $145
and he sold out for a profit of $50,000 on the 1000 shares. This transaction helped him
regain his confidence and got him to stick to his rules again. He brought his account up
to $500,000 at one point, and he finished the year of 1915 with $150,000 in his account.
By the end of 1916, Livermore had started shorting the market. The market soon
began to decline. Many leading stocks had topped and started to decline in price when
the famous leak spread that President Wilson was set to offer a peace plan to the
Germans. Wall Street would view this as a negative event because it would hurt the
wartime economy of supplying goods to foreign nations. Bernard Baruch (featured in
Chapter 2), who had become a friend of Liver-mores, was also short in the market at
this time and was rumored to have made $3 million on the news leak. A Congressional
committee was formed to investigate the rumor leak, and Baruch and Livermore were
called on to address the committee. Baruch had admitted that he made $470,000 on his
short positions during this time, but he vowed it was not due to having advanced
information of the rumor. The New York Stock Exchange nonetheless enacted a new
rule stating that it was not proper to trade on news leaks. Of course, this ruling was
difficult to enforce but it showed the influence of Livermore and Baruch on the market
at that time. Livermore himself cleared approximately $3 million in 1916 by being both
long during the rising part of the year and short during the later few months, in which
the market turned sharply downward.
On April 6,1917 the United States entered World War I, and after many successes in
the market Livermore would begin to pay off all of his previous debts, even though
legally through his 1914 bankruptcy filing, he was not obligated to do so. He also, at the
age of 40, established a trust account to insure that he would never go broke again.

Regaining Prominence

By 1917 Livermore was now gaining back his once prominent reputation on Wall
Street. On May 13,1917 a New York Times article ran called Exit the Swashbuckling
Trader of Wall Street: Present Day Speculator in Stocks Is More of a Student and
Economist Than the Sensational Manipulator of Other Years. The article featured both
Jesse Livermore and Bernard Baruch and further identified them as major players and
influential and successful stock traders on Wall Street.
During the 1920s Livermore determined that experience was one of the key
essentials for continued success in the market. His reputation as one of the best and
most successful traders on the street was increasing. He was truly living the American
dream, becoming a very wealthy man by following his trading rules. He always
considered himself a student of the market and thought it was a continuous learning
process. Livermore was convinced that no one could ever master the market.
At about this time he began to find out how important it was to discover which
stocks were the real leaders of a strong market movement. He would continuously study
how leaders would stand out from the crowd and become the real price gainers. His
study of the tape and improved understanding of how the market worked led him to
refine his industry leaders approach. He would discover that each new major uptrend
in the market would produce these new leaders in new leading industries, usually based
on the greatest profit expectations. This reiterated to him the importance that
fundamentals have in the market and on stock prices. His other discovery of how
certain stocks act alike in the same groups and how the leading groups act in
conjunction with the general markets would be a key to his even greater success that
was coming his way in The Great Crash of 1929.
From the winter of 1928 to the spring of 1929, a full bull market was in session.
Livermore was long for the ride up and profited handsomely, and he then began looking
for a top in the market. In the early summer of 1929, he sold all his long positions,
preferring to sell on the way up. He also thought the market had become overextended.
He saw a tremendous rising market, and a market that had begun to change to a
sideways trading pattern, rather than the strong rising market it had been. He started to
send out his probes on the short side.
Livermores probing strategy consisted of taking small positions at the beginning of
a trade. If a trade turned out to be successful he would add more shares and continue
buying (or shorting) as long as the action was proceeding in the way he thought it was
to proceed, which was his pyramiding strategy. He always averaged up in price instead
of averaging down, which in his day and for most today is the more popular way, but it
is not the most profitable way. He would utilize many different brokers so as not to tip
his hand to Wall Street, as his trading power and reputation was something that
interested many on the street.
As his probing trades started to work, Livermore was certain the market would
begin to turn down, as prices had been rising at an incredible rate for quite some time.
This is one of the important skills that all the great traders featured in this book
employed. When everything seemed fabulous and terrific, they would always look for
signs in the market that things were about to change.
The market in 1929 gave plenty of signals of crashing beforehand. The leaders of
the day stopped making new price highs and started to stall. The smart money at that
time was beginning to sell into the strength. Also, just about everyone was on 10-
percent margin and everybody started giving stocks tips and thought they had became
stock market experts. This overexuberance is a clear signal that when everyone is
invested in the market, there is simply no more buying power left to continue moving
the market higher.
When the market finally crashed in October 1929, Livermore held many shares in
short positions he had been building over the previous months. He netted a
multimillion-dollar profit on The Great Crash of 1929 when he covered his short
positions. When just about everyone else was wiped out due to margin calls and others
were rumored to be jumping out of office buildings, Livermore had one of his greatest
paydays ever. He was actually blamed for the crash by many, from his prior reputation
as The Great Bear of Wall Street, and he received many death threats from people
who had lost everything they had. The New York Times even ran an article with the
headline Jesse Livermore Reported to Be Heading Group Hammering High-Priced
Securities... shortly after the Crash began.
Following the crash, Congress passed the Securities and Exchange Act, forming the
Securities Exchange Commission in hopes of providing stability and order to the
markets by making sweeping changes regarding stock trading. Despite those changes,
Livermore came to the conclusion that he would not have to change his own rules
because human nature would not change and it was human nature that ultimately
controlled what happened in the stock market.
Though Livermore made many millions on the short side of the market, as he did in
1929, it is usually more difficult to achieve superior results shorting stocks due to the
unlimited potential loss one could experience. A rising stock can keep going higher, but
a declining stock can only go to zero. It also takes stronger control of your emotions to
successfully trade short. You also must be able to react quicker, as fear is the driving
force behind price declines and hope is the driving force behind price increases.
Because fear instills a quicker reaction than hope, you must be able to react to swifter
changes in the overall psychology of the market.
Jesse Livermore, even though he achieved great wealth, still faced many personal
challenges throughout his life. Through difficult marriages, divorces, and other family
problems, Livermore became severely depressed. He did not achieve as much success
in his trading during the 1930s as he did in previous periods, growing more and more
depressed about his personal problems. In fact, in 1934 he filed bankruptcy one more
time, as it was rumored that he had lost the fortune he had made just five years earlier.
This depression, caused by the personal problems in his life, proves how important it is
to have ones emotional mind-set in balance to consistently perform for profits in the
market and avoid costly mistakes. Many of these later times in his life were in stark
contrast to how he disciplined his lifestyle when he was at the top of his game earning
his successful reputation on Wall Street.

A Chronicle of Success

In late 1939, he decided to write his own book about his trading strategies, and in
March 1940 Livermores book entitled How to Trade in Stocks was published. The
book did not sell well, mostly because there was little interest in the stock market at
that time due to the lingering effects of the Great Depression. The original work is,
however, a great resource for all aspiring traders to study.
Just months after the publication of his book, on November 28, 1940 Jesse
Livermore, in a deep depression, committed suicide. He died instantly from a self-
inflicted gunshot wound.
For Livermore, the stock market was the greatest, most complex challenge in the
world. His desire and passion was in beating the game of Wall Street. Livermore
believed that stock speculation was more an art form than pure scientific reason.
Jesse Livermore is regarded by many as probably the greatest stock trader ever.
The investment classic Reminiscences of a Stock Operator, originally published in
1923 by Edwin Lefevre, is the fictionalized biography of Jesse Livermores life.
Reminiscences remains one of the most widely read and highly recommended
investment books to this day. Richard Wyckoff wrote a short book entitled Jesse
Livermores Methods of Trading in Stocks derived from an interview he did with
Livermore in the 1920s. The work details many of Livermores unique trading
strategies. Many other articles and books have been written about Jesse Livermore over
the years, as his legendary life continues to generate interest today.
Livermore was a unique individual who paved the road for many traders with his
discoveries of what worked and what did not work in the stock market. He was a
reclusive and private man, always keeping secret his trades and records. He was one of
the first to buy stocks making new highs and breaking through resistance points. This
strategy was contrary to others who believed it was best to buy stocks as low and as
cheap as possible. Livermore always said he lost money when he broke his own rules
and he always made money when he followed them. He worked incredibly hard at
analyzing the market and studying speculative theories, and he disciplined his lifestyle
to be at peak performance at all times. He made all the mistakes that most make in the
market, but he learned from them and he constantly kept learning even more by reading
the tape and studying the market.
His famous saying that has been quoted by many sources over the years is that Wall
Street never changes. The pockets change, the stocks change, but Wall Street never
changes because human nature never changes. This statement describes the importance
psychology plays in the market. He believed that people have acted and reacted the
same way in the market due to hope, fear, greed, and ignorance, which is why the
numerical formations and patterns of stocks recur on a consistent basis over time.
Livermore also believed that the market was one of the hardest things to be
successful at because it involved many people and human nature. It involved
anticipating trends and future direction. It was most difficult because controlling and
conquering human nature is a very difficult task. Livermore was so interested in the
psychological aspect of the market that at one point he the even took psychology
courses, just as he had studied securities. Taking these courses proved how dedicated
Livermore was to understanding every aspect of the market, even those areas that might
not have seemed related to the securities business by most. Livermore would look for
every advantage he could in trying to enhance his skill set.
Livermore was actively involved in stock trading for a total of 48 years from 1892
to 1940. Through his many years of experience that included numerous ups and downs,
bankruptcy, and incredible wealth, he developed several strategies to gain success in
the market.

The Livermore Way: Setting Standards in Trading Rules

Jesse Livermores strategy evolved over the many years he traded stocks. In fact,
trading stocks was his only real career. Through both many setbacks and positive
experiences, he perfected and constantly kept learning what worked and what did not
work in the stock market.
Below, well discuss the strategies he devised, which many of the great traders
following him also implemented in their own trading rules.

Skills and Traits of the Successful Trader

Livermore believed there were certain traits that were required of the successful trader,
and that trading was definitely not suited for everyone. It was a vocation not for the
stupid, the mentally lazy, or those of inferior emotional balance and especially not for
those who expect to get rich quickly. This was an important point for Livermore.
One of the keys to successful trading was in understanding the time element
mentioned earlier. Livermore respected the time element insofar that he believed that no
one should use the market as a get-rich-quick mechanism. Viewing the market that way
was extremely dangerous and usually produced the exact opposite results. Emotional
balance, something Livermore later in his life struggled with and that ultimately led to
his tragic death, was vitally important, as success in the stock market was more of an
emotional battle than an intellectual battle.
One of the qualities that Livermore believed is required for successful trading is
poise. He knew that a healthy state of mental balanceone that was not to be
influenced by hopes or fearsis a key skill of the successful trader. Patience, which
means waiting for the right opportunity, is another required skill. The lack of patience
in a trader is a weakness and a major cause of losses. Also, being silent and keeping to
yourself about your losses and your gains is a crucial skill. The work ethic to constantly
study the market is also essential.
Livermore viewed stock speculation as a full-time job because it requires
someones full attention in order to excel. Just as successful doctors or lawyers need to
be trained well and study hard in their professions, stock traders are no different. Most
people dont view the stock market as something that requires as much effort as the
other professions mentioned. Most view the market as easy and effortless because in
order to participate, all one needs to do is to instruct a broker to enter a trade. Or one
just needs to hear a tip from an outsider and then act on that information by placing a
trade and waiting for the money to arrive. Whereas no one in his right mind would
allow you to perform surgery on him or defend him in court without the proper training
and certifications, the same should hold true in stock trading. It is definitely a skill that
must be perfected over time. Livermore treated stock trading as a business and
constantly looked for new ways to improve his skill set.
Areas of expertise he thought essential were:

Emotional control (controlling the psychological aspects that affect every trader).
Knowledge of economics and fundamentals of business conditions (the wisdom
necessary to understand how certain events can have an impact on the market and
stock prices).
Patience (the ability to let your profits run is what separates the great traders
from the mediocre traders).

Four other key skills and traits he thought were required were:
Observationstay focused only on factual data.
Memoryremember key events so you dont repeat prior mistakes.
Mathematicsunderstand the numbers and fundamentals. This was a gift and
strength of Livermore.
Experiencelearn from your experiences and errors.

The Disciplined Trader


The honesty and sincerity of accurate record keeping, doing your own thinking, and
reaching and making your own decisions were all vital disciplines according to
Livermore. Every time he did not make his own decisions, he lost money.
Livermore did an extensive review of all his trades, especially the losses. This was
one of his most determined traits and one he started early in his career. This review of
past trades was the best learning mechanism for him in order to avoid future losses and
repeating prior mistakes.
Another discipline Livermore started later (and if he had done so sooner likely
would have helped him avoid some of his lowest moments) would be to take half of his
profits, usually on trades where he doubled his money, and put them in a cash reserve.
This reserve would serve him well in avoiding bankruptcy. It also supplied needed
capital when the market would turn, and he could use it to take advantage of changing
market situations.
Another key lesson Livermore learned early on was that trading every day and or
every week is a losers game and cannot be done with much success. He learned there
were many times to make money trading stocks and there were times when you should
not trade at all. It was healthy for him to take many breaks and vacations when the
market did not offer its best opportunities. This discipline forced him to not trade all
the time. By staying on the sidelines and being observant, one can see more clearly the
major changes than if one were constantly observing minor fluctuations day in and day
out.
Livermore was always very vigilant about his constant quest for reading the tape
and analyzing the price movements of the market and individual stocks. The discipline
he applied to his trading and how seriously he applied himself is legendary. He studied
in private during the early morning hours at his residence, usually putting in an hour or
two before breakfast. This quiet time alone with no interruptions was very important to
him. After being well rested from the night before, he found this early morning ritual a
great mental exercise for himself. He could analyze economic conditions, the news of
the prior day, and then determine the appropriate actions he believed he would take and
how the market might react.
His reclusive nature would allow no outside influences from others contradicting
his thought process. At his office he would allow no talking from his help during the
day, and he made sure he would stand for most of the day. He would do this to get a
clear view of the tape and also because he believed a perfect posture from standing
upright allowed him to think more alertly. His desk was said to be always immaculate
as far as papers and how it was organized. Livermore clearly disciplined his trading
life to be at peak performance.

Pioneering New Trading Rules


Livermore was a pioneer in many of the trading rules he implemented. He really did not
have anyone else before him who experienced great success in order for him to learn
from. Livermore learned from his mistakes, and he studied the market with total
concentration and utilized his experience to discover what worked and what did not
when it came to the stock market. Trial and error and experience paved the way for
many other traders in the following years to learn from his strategies.
Many traders came to follow the basic principles Livermore employed, often
learning the rules through their own mistakes. For instance, Livermore was presumed to
be one of the first traders to buy stocks when they hit new highs in price. He would
make purchases when a stock made a new high on increased volume after experiencing
a normal correction or reaction. The same rules would apply to shorting stocks, as he
would take his short positions as weak stocks kept hitting new lows. He would never
buy a stock making new lows, and he learned over time to never average down in price
by buying more of stock as it began to decline in price. This strategy, called dollar cost
averaging, is a losing strategy and one that none of the great traders featured in this
book followed.
Livermore was not a chartist, because he read the tape and price movements. Even
without using charts, a skilled tape reader still knows when active stocks are about to
or were hitting new higher prices. Livermore was a skilled tape reader, which is a very
difficult art to master. Tape reading is very difficult because of the constant viewing
that is required, and it can become very emotional. It takes extreme discipline and
strong rules to avoid getting caught up in the tape. The greatest tape readers
(Livermore, Jack Dreyfus, and Gerald Loeb) all would rely on the feel they received
from the tape through their experience, as opposed to getting caught up in the emotional
trap of the tape.
Livermore also applied mathematical analysis as his tool for evaluation, but he
mostly received all the information he needed by concentrating on the price and volume
action of the tape. A strong confirmation to him, in the possible purchase of a stock,
was when a stock was making an all-time high with a noticeable increase in volume
accompanying the increase in price. This is a strong indication that the demand for the
stock is solid. Volume was a clear indicator to Livermore. He thought that high volume
in either individual stocks or in the general market indicated that a change in direction
was most likely confirmed. He would attempt to take full advantage of these volume
clues as they were presented to him. Volume would be a clear signal for Livermore to
implement quality buy-and-sell rules.
He viewed these volume increases as alerts that something was happening. It
probably didnt matter to him what it was, as the action of the tape was sufficient
enough evidence. He thought that if the trend was that strong, then that was all the proof
he needed. He didnt really need to try to discover the exact reason why many investors
had finally decided to have a strong demand for a particular stock. If the move was to
the upside, the trend would likely take the stock higher. If the move was to the
downside, it would likely take it lower. That confirmation would be a signal to him that
it was time for him to act. His trading decisions were based on the probability of the
next move and a current change in the trend.
These purchases made at new highs could not be made without other vital factors in
place. Livermore realized that you had to make the purchase at just the right time. For
example, he would look for prices breaking through resistance levels. This price action
occurs when a stock breaks through an area where it had previously been trading and
creates a new line of least resistance. He would determine the line of resistance at the
moment of trading and then wait for the moment when that line defines itself. This was
viewed as the perfect psychological time to enter a trade at the beginning of a major
market move or a change in the basic trend. This could occur either in an individual
stock or the general market. It also didnt matter to him in which direction this action
would occur, as he played both sides of the market.
He would then observe the action of the stock closely to see if the trend in the
movement continued in that direction. If it did, then the movement was confirmed with
this continuation and the new trend was underway. It is not wise to chase a stock too far
past this point, as the risks are usually too great at that time for failure. (This is similar
to how ONeil views chasing after extended stocks discussed in Chapter 5.) It is also
not prudent to buy before this move occurs, as this might prove to be premature because
the stock, might never move in the desired direction. Livermore wanted the action of the
stock going through these key points to lead him into new positions. He used these rules
for short positions as well. If a stock traded at a new low and it formed at a certain
point (rallied from a new low and then dropped through to a new low), he would think
that most likely the fall would continue and he would establish a short position in the
stock.
Buying at new highs after stocks had made minor reactions or corrections and then
breaking through these areas was an action he called breaking through the line of least
resistance. It correlates to a body in motion. Once a stock breaks through its line of
least resistance, it is free to continue in the new direction or trend. Livermore thought
the stock at this point had the greatest chance to proceed upward in price, if he was
long on the stock. Again, it is important to wait for these actions to occur before making
a trade. This would confirm for him that the market was going to move in a certain
direction. This strategy would act as a risk-controlled mechanism for him.
This action was also the beginning of the psychological move of a market trend. If
the market would not continue in that direction, he knew it was a wrong move and he
would cut his losses short and exit the trade. Waiting for that action was very important.
This required a great deal of patience. He would sit on cash for as long as it took
before he would commit money.
Volume action also must be studied closely as it continues, so as to observe when
the trend stops moving in the proper direction. Because the market always moves
reflecting many investor decisions, this does not mean that minor and normal
corrections and reactions dont occur.
Another important key in Livermores trading rules was to concentrate only on the
leaders of a new bull market. He also kept the number of stocks he followed small and
manageable. And he waited for the market to confirm the leadership before committing
to the trade. He concentrated on the leading groups instead of spreading himself all
over the market. He noticed that the leading stocks of the new leading groups were
usually the strongest stocks. He avoided the weak industries and the weak stocks within
those industries. This proved his avoidance of cheap stocks. He observed that weak,
declining stocks recover with great difficulty and he confined his activity to the active
stocks that were moving.
He would stay observant of the market and linked stock price movements of a
leading stock to others within its industry. Also, in the leading groups he noticed that if
a particular stock did exceptionally well, some of its peers in the same group would
also do well. Noticing this was an important factor in the movement of prices, he would
often watch many stocks within the same group to monitor their actions. He believed
that prospects would work alike with most stocks of a given group. He would call this
the manifest group-tendency. If during a strong market a certain group was experiencing
stocks not acting in a strong way, he would usually sell out any positions he had in that
group or avoid stocks within that group altogether.
Livermore would always watch other stocks in the same industry in which he made
his trades to observe unforeseen circumstances. He would notice that if one particular
leader in a strong group started to act adversely, the other stocks in the group would
normally start to act the same way. This constant observation always kept him apprised
as to what was happening within the leading industry groups and the general market.
He would also notice how certain groups would have seasonal patterns to them. It
is important to understand how economic cycles play into certain industries and how
their cycles can affect stock prices. One must also understand that the stock market
usually discounts seasonal activities in advance. Therefore, it is crucial to be able to
foresee certain industry conditions many months in advance. This understanding
reinforces the need to constantly be observant and to be aware of economic and
fundamental conditions.
One of the ways in which Livermore called the tops of the 1907 and the 1929
markets was because the leading stocks and the leading groups weakened months
before the actual market indexes crashed. He deduced that when the leaders begin to
roll over, one should look out, as the rest of the market usually follows. In 1929, the
lessons he learned from the 1907 crash allowed him to take full advantage of the market
clues, and through his experience, he realized some of his largest profits.
Livermore also discovered that when the leaders usually top and roll over, he
would not try to always understand why. He let the market make the moves. He
wouldnt waste time trying to figure out why a stock declined, all he had to know was
just that it did decline and that he needed to act accordingly. The why, he discovered,
will usually come out later, as the stock market almost always discounts future news.
To correctly buy the leading stocks in the leading industry groups after they break
through their lines of least resistance, and make sure he was on the correct side of the
market, Livermore implemented his probing and pyramiding strategies.
Before implementing a trade however, it is wise to understand the trend of the
general market. Livermore believed that the market would blend the future into the
present, and that is why it was always difficult to accurately predict what the market
will do in the future. The market would always do what it wanted to do and not what it
was expected to do. He would be long in a bull market, short in a bear market, and
during sideways markets he would stay in cash until a confirmed trend one way or
another was established. Discovering this change in trend was one of the hardest things
to do because it went against what was currently being thought and acted on at the time.
This is why he started using his probe strategy.
Livermores probing and pyramiding strategies worked by taking partial positions
in a stock until he reached the total number of shares he initially intended to purchase. It
was very important for Livermore to decide how much of a stock he was going to buy
before he actually started buying. This is a product of good money management
planning, which was one of Livermores key rules. He would take a small position at
first to test the stock, which was the probing strategy, and then see if his initial research
was correct. If the stock worked out in the way he had planned, he would buy more, but
he would always make sure each successive buy would occur at a higher price.
For example, if he knew he was going to purchase 400 or 500 shares of a certain
stock, he would first wait for all the other conditions of his rules to be in place. Then he
would purchase one-fifth of his intended purchase or 100 shares (in this example), or
only 20 percent of his initial position in the stock. If the stock moved against him he
would sell it and take a small loss. If it drifted for a few days, he would also exit, as it
did not perform as he thought it would. If the stock moved up in price he would make
another purchase. This second purchase would be at a higher price than the first
purchase and would be for another 100 shares, or another 20 percent of his original
planned position.
At this point he would now own 200 shares of a rising stock that was acting in the
way he had thought it should act. This is very important. This removes many of the
emotions from the process. His rules would guide him, based on how the stock was
acting in the market. He did not rely on hope, fear, or greed. His rules would dictate if
he would continue to purchase more shares or begin to exit the stock because it would
start to decline.
If the stock, in this example, kept moving up in price, he would buy the remaining
shares, or in this case the balance of either 200 or 300 shares. This is how he would
manage his risk in a particular issue. It was by constant observation of the price action
and following the trend of that action.
This strategy requires very detailed observation, but again its not supposed to be
easy. Livermores dedication to tape reading and experience produced incredible
results as he refined these strategies and adhered to them on his way to producing
profitable results.
Once Livermore established his positions, either on the long side or the short side,
he would then begin to look for sell signals. It is often said that the hardest part of stock
trading is not the buyingits the selling. It was no different in Livermores day.
Livermore liked to sell as a stock kept advancing in price. Again, this is extremely
hard to do, as it goes against the emotion of greed that would probably be dominating
your thoughts as your winning position kept providing you more profits. Its the
disciplined traders through experience and knowledge who know through constant
market observation how to remove the emotion and take advantage of the right time to
exit the position. He knew he could not sell at the absolute top, so he again kept his
vision on the tape and looked for signals to sell after a stock had risen for quite some
time and then displayed abnormal price and volume action. Little upward price
movements on increases in volume and large price declines on increased volume are
some key selling signals today that also applied in Livermores day. Experience plays a
large role in knowing how to distinguish abnormal price and volume behavior.
Livermore would normally only enter a long position if he saw at least a probable
profit of 10 points or more. Many of his big winners were much larger than that, as his
patience in sticking with them paid off. However, many of his trades did not go the way
he initially intended them to go. If the stock began to move down, he would sell out at a
minimal loss of a few points. This action was a confirmation to him that his judgment
was probably wrong. In the stock market, when you are wrong the best way to correct it
is to do something about it. In Livermores case, it was to sell and move on to
something else. If the stock drifted and didnt move much, he would also close out his
position, as this represented an opportunity cost to him. He would rather be in stocks
that are active and moving in one direction or another.
Most of Livermores strategies and rules were based on thinking differently about
the market than most others did in his day. His main strategies could be summarized by
the following:

Understand the general trend of the market. You must be in tune with what the
market is currently doing and be observant of it at all times. Watch and move
with the market; dont fight against it.
Buy stocks hitting new highs in price as they pass through certain resistance
areas. Use a probing strategy to test your moves and pyramid additional buys on
increases in price.
Cut your losses short. Protect yourself from a wrong decision at no more than a
10-percent loss. Sell drifting stocks, as their inaction is an opportunity cost.
Let your profits ride, as your strongest stocks keep moving up or down (if in short
positions). Be patient with stocks that are acting correctly. The big money is
made by sitting tight.
Leading stocks in leading and strong industries is where your concentration
should be.
Avoid tips and information from others. Conduct your own homework, stick with
the facts, and understand the fundamentals.
Avoid cheap stocks. The big money is made in the big swings, and they usually
dont come from cheap stocks.

Especially in Livermores day, these rules were viewed as totally inaccurate and
wrong. However, the success and wealth that Jesse Livermore attained proved in the
end that these were the right strategies to implement.

Proven Strategies Applied Today

To prove how the market doesnt really change over time and how stocks repeat similar
patterns, the following charts illustrate how Livermores strategies could be applied to
the current market environment. Beginning in mid-March 2003, the market started a
convincing uptrend following the brutal bear market that began in March 2000. After
three years of declining prices, the market confirmed its new uptrend with new leaders
taking charge. Improved economic conditions and forecast improvements in corporate
profitability set the stage for a classic uptrend that, as of this writing, has passed its six-
month anniversary.
Several professional money managers today do utilize strategies that Jesse
Livermore pioneered back in his day. One of the new emerging leaders of the March
2003 uptrend was Stratasys, Inc. (SSYS). Stratasys is a technology company that
develops, manufactures, and markets 3-D rapid prototyping devices that create physical
models from computerized designs. Stratasys also is a leading, fundamentally strong
stock, as its quarter ended December 2002 showed an 81-percent increase in earnings
and a 13-percent increase in revenues. The quarter ended March 2003 showed even
better performancea 243-percent increase in earnings and a 67-percent increase in
revenues.
Figure 1-1 illustrates the action of the stock from January 2003 through March 2003
and notes key areas where Livermores strategies could have alerted the observant
trader. Even though Livermore was a tape reader as opposed to a chartist, the chart
illustrates clearly how his strategies could have been used to identify a strong new
market leader as the general trend of the market turned up and began a strong rally.
Figure 1-1 Stratasys, Inc.January 2003 through March 2003.
Source: www.bigcharts.com.

In Figure 1-1 we see the following points when implementing strategies from
Livermore:

Waiting for the general market to turn upward (market confirmed uptrend on
March 17,2003).
Looking for new leaders breaking through resistance points (Stratasys broke
through $13 for the first time in over three years).
Volume playing a major role in the stock breaking through the resistance point,
confirming the demand for the stock.

Figure 1-2 illustrates more key trading rules of Livermore as we watch the
progression of Stratasys for the next three month periodApril 2003 through June
2003.
Figure 1-2 StratasysApril 2003 through June 2003.
Source: www.bigcharts.com.

Figure 1-2 shows how using additional strategies from Livermore with this new
leading stock could lead to profitable gains such as:

Being patient with a confirmed leading stock and letting it consolidate its gains.
Utilizing the pyramiding strategy to add to winning positions if the stock is acting
as you expected.
Holding tight and not being tempted into taking short-term profits as long as the
stock and the general market are acting as you expected.

Purchasing Stratasys on March 21,2003 at the closing price of $13 would have
yielded a 166-percent profit by June 30, 2003 as Stratasys closed that day at $34.58.
Its important to note that waiting for the general market to confirm its uptrend is
crucial. The NASDAQ (the leading index of the uptrend) staged a reversal pivotal point
on March 12th when it closed up 7.7 points to finish at 1279.23 on an increase in
volume. The confirming strength came the very next day when the NASDAQ shot up
61.54 points to close at 1340.73 on an even larger increase in volume. The next day
showed a small pullback of only .45 points in the index. This is constructive action
considering the prior day showed such a large increase. The following session
(Monday, March 17th) was the convincing confirmation (see Chapter 5William J.
ONeil and his assessment of market confirming action) when the NASDAQ zoomed up
51.95 points on even greater volume.
The NASDAQ average was up 27.6 percent from its low of 1271.46 on March 11th
to its close of 1622.80 on June 30, 2003. As the market continued its uptrend, Stratasys
and the NASDAQ continued gaining ground. On September 30, 2003 the NASDAQ
stood at 1786.93, up 40.5 percent from the low it established on March 11th. Stratasys
closed at $42.62 on September 30th or 227.9 percent from its breakthrough point on
March 17,2003.
Looking at the same time period we just analyzed, we can view another strong
leader of the most recent uptrend. Netease.com (NTES) is a China-based Internet
company that develops applications, services, and technologies for the Chinese Internet
market. China has been viewed as a fast-growing economy and many Chinese
consumers have adopted the Internet. The ADR (American Depository Receipts) shares
of Netease.com trade on the NASDAQ market, and the Internet group that Netease.com
is a part of was one of the leading industry groups of this uptrend. Figures 1-3 and
Figure 1-4 take us through a similar analysis as we saw with Stratasys.
Figure 1-3 Netease.com. January 2003 through March 2003.
Source: www.bigcharts.com.
Figure 1-4 Netease.com. April 2003 through June 2003.
Source: www.bigcharts.com.

With Netease.com we see similar patterns we saw with Stratasys. We see a new
leader breaking through a resistance area on large volume shortly after the general
market starts an impressive uptrend. Netease.com also exhibits very strong
fundamentals. The quarter ended December 31, 2002 showed a 207-percent increase in
earnings and an 815-percent increase in revenues. The quarter ending March 31, 2003
produced a 486-percent increase in earnings and a 392-percent increase in revenues.
Clearly, this is a dynamic company in a growing market segment that has attracted the
attention of large institutional traders that are accumulating positions in a new leader
during a new market uptrend. Netease.com, if purchased at $16.60 on March 26, 2003,
was up 119.7 percent as of June 30, 2003, when it closed at $36.47. By September
30,2003 Netease.com was $55.86 per share, or up 236.5 percent from the breakthrough
point in March.
As you read about the other great traders that follow, youll discover that the
strategies and rules Livermore implemented were repeated by most of the others and
were key strategies to their success in the stock market.
2
Bernard Baruch

...even being right three or four times out often should yield a person a
fortune if he has the sense to cut his losses quickly on the ventures where he
has been wrong.

Dr. Facts

Bernard Baruch was born in 1870 in South Carolina. He graduated from the College of
the City of New York and he began his Wall Street career in 1891 when he joined A.A.
Housman & Company, a small brokerage firm in New York, as an office boy, runner,
and general utility man that paid him $5 per week.
In order to try to advance in his career and move up in the firm, he decided to take
night classes in bookkeeping. Through his studies he learned how to analyze the
financial aspects of a company. He also started reading The Financial Chronicle on a
regular basis. He read constantly about many subjects, always trying to learn more,
especially concerning the subject of finance. He also began to speculate in stocks on his
own. Back then the margin rate was only 10 percent (same as listed in Chapter 1 for
Livermore), allowing for an individual to put up only 10 cents on the dollar when
purchasing stocks.
Baruchs original trading started out like most, consisting of a few wins and then
giving it all back due to a lack of knowledge, experience, sound rules, and discipline.
Baruch struggled with his trading in these early years and didnt make much progress.
His trades were made mostly by buying small stakes on margin, usually 10 shares each,
on the Consolidated Stock Exchange. Most of his trades were in industrial and railroad
stocks. He even, like Livermore, tried his hand at the bucket shops in New York.
However, Baruch found he was not very successful when it came to the quick action of
the bucket shops.
His first major mistake in the speculation business was taking a tip from an outsider
about a railroad venture. This venture was to build a tramway to a Put-in-Bay (an
island in Lake Erie) hotel. He was so excited about it that he also convinced his father
to invest $8000 in the venture. Baruch ended up losing every dollar as the venture
failed. Even though his father showed confidence in him and offered him another loan
shortly thereafter for $500, Baruch took the experience of this first major loss very
personally. As with most traders, Baruch found out you had to lose money in order to
try to better yourself.
This loss taught him a valuable lesson. He started analyzing his losses to try to
determine the mistakes that were made in causing these losses. This was for him, as it
was for Jesse Livermore, a discipline he continued throughout his trading career. This
self-analysis became a great learning tool for him as well. For Baruch, the evidence of
his losses became clear to him. He thought that most of his losses stemmed from a lack
of knowledge of what he was investing in, such as the companys fundamentals and
what the companys prospects were for future growth and profits.
The other factor he attributed to his losses was that he was trading beyond his
financial resources. He found out it was impossible to run up a fortune on a shoestring
and that real success in the stock market was going to take time. How true success in the
market occurs over a longer time frame, as opposed to quick riches, became evident to
him just as it had to Livermore.
As Baruch continued his trading and learning, he began to discover how the market
actually worked. For example, a panic in 1893 caused a depression that affected the
railroads and lasted until 1895. During these early years, in 1893, Baruch became a
bond salesman with his firm. This depression era caused him to be more cautious
toward his clients trading accounts than he was in his own trading.
One discovery he did make during this time was how large financial gains can be
made when the economy emerges from a depression period. During periods of the
1890s and early 1900s, depressionlike and recessionary economic times were
commonplace. And recessionary periods would last much longer than they have in more
modern times. After experiencing a few of these economic cycles, Baruch would see
value in purchasing stocks when panics hit and when stocks were at low depression
prices. He always knew, from his careful observation experiences, that a recovery
would come along and good opportunities were there for the ever-observant speculator.
But as many discover, Baruch found out that the education process takes time.
In 1895 his salary was increased from $5 per week to $25 per week, but after four
years on Wall Street he still had little to show in terms of accumulated personal
financial assets. His raise in salary actually induced him to more unprofitable trading.
He was still overtrading and this caused him to go broke many times. Each market
fluctuation would cause him to trade more, which led to still more losses. This was one
of the early pitfalls that Jesse Livermore also experienced. The results Baruch was
achieving were discouraging to him, but he pressed on and vowed to keep learning.
After begging for an even larger increase in his salary, Baruch was given an eighth of
an interest in the firm. This made him a partner in the firm, at the young age of 25. He
was quickly starting to climb in rank, his job performance viewed positively by top
management. These early years would also prove to be his training ground in trading.
He even lost every cent of a $6000 bonus he earned at Housman during his first year as
partner.
At Housman, Baruch would also work deals in trying to buy control of other firms
for his clients companies. His firm would receive commissions on the transactions for
purchasing large amounts of stock in trying to gain control of the companies he was
targeting. After a few successful deals, his share in the firm was increased to a one-
third ownership position.
In 1897, Baruch purchased 100 shares on margin of American Sugar Refining after
researching the company before making his purchase. As the stock rose throughout the
next six months, he used his earnings on the stock to buy more. This pyramiding on the
way up in price is what also became a profitable trading tool for Livermore, as we saw
in Chapter 1. Baruch kept buying as the stock kept rising in price, and he watched his
position closely, careful not to let the gain turn on him. When Baruch finally sold out, he
had made a profit of $60,000. At that point he bought a seat on the New York Stock
Exchange for $19,000 but ended up giving the seat to a relative in need, due to financial
difficulties, before he had taken title to it. This success on American Sugar Refining
was the turning point for Baruch in becoming a successful speculator.
Due to the success of his firm in 1899, he made enough money to buy another seat
on the New York Stock Exchange. He purchased this one for $39,000. This transaction
caused his confidence to increase, as his name would now be listed among the elite
members of the stock exchange. The earnings for A.A. Housman that year amounted to
$501,000. Baruchs share, because he was a one-third partner, came to $167,000. It
seemed he was well on his way to a very successful and financially rewarding career.
But soon thereafter he purchased American Spirits Manufacturing Company at $10 per
share on a tip and put most of his money on it. It declined to the point of nearly wiping
him out in just a few short weeks, as the price dropped from 10.25 on June 13, 1899 to
6.25 on June 29 a few weeks later. This was a devastating blow to his just recent
success and caused a temporary loss in his confidence. The lesson he learned here was
not to buy from tips or others recommendations and to always establish a cash reserve
for future opportunities. He indeed concluded that the main difference in his prior
success with American Sugar Refining and this current loss with American Spirits
Manufacturing was directly related to one (the gain) benefiting from his own research
and the other (the loss) being caused by a lack of effort and fact-based research on his
behalf.
As he kept learning and his trading became more successful, Baruch termed trading
in stocks as speculation, which comes from the Latin word speculari, which means to
spy on and observe. He defined a speculator as a man who observes the future and acts
before it occurs. Acting swiftly in the market is a key to success. One must search
through a maze of complex and contradictory details to get to the significant facts. Then
he must be able to operate coldly, clearly, and skillfully on the basis of those facts that
are presented before him. The challenge for the successful speculator, he stated, is how
to disentangle the cold hard facts from the rather warm feelings of the people dealing
with the facts.
Baruch often said his career on Wall Street was one long process of education in
human nature. He viewed the market as a makeup of people trying to read the future,
which can become very emotional. This discipline of dealing with the facts earned him
the nickname Dr. Facts from his relationship later on with President Theodore
Roosevelt.

Research is a Virtue

After his $60,000 loss in American Spirits, Baruch made a quick comeback with a
$60,000 profit in Brooklyn Rapid Transit Co. (B.R.T.) after he righted his tips error.
This time he did his own research, and with this comeback he began to regain his
confidence.
As his trading continued, Baruch shorted Amalgamated Copper in 1901 and made
his biggest profit ever up to that point. He made this profit by being patient, doing his
own research, and letting his short profits run instead of taking a quick gain when his
trade proved correct. He also would not listen to others who said he was on the wrong
side of the market and that stock at the time. In June of 1901, the price had risen to $130
per share. Through his research, he thought the high price would not be sustained due to
the fact that copper conditions didnt look to support the price of the stock.
In July and August of that year, the price indeed began to decline. On September 6,
1901 President McKinley was shot in an attempted assassination attempt and went into
a coma. Baruch decided to start shorting the stock, due to the uncertainty of the country
and events at the time. He stayed fast to his thinking that the supply of copper would
exceed the demand. He continued to short the stock on its decline, as his original
positions were proving him right. When he closed his positions near $60 per share, he
netted nearly $700,000 in profit. This transaction also gave him confidence in his
ability to stick to his research and the facts.
Shortly thereafter he began purchasing Louisville & Nashville Railroad (L&N)
after studying the company and their prospects for profits. The price was at under $100
per share during the summer of 1901 after the sharp decline of Northern Pacific, which
had previously run up significantly, and its subsequent decline was partly responsible
for causing the panic of 1901. He began purchasing L&N because of his studies, and he
wanted to realize one of his boyhood dreams of owning and running a railroad. By
January 1902, L&N was in a strong uptrend. With a group of investors he began buying
more shares in trying to gain control of the company. His dream never materialized, as
his group never gained full control of the company, but he ended up selling his shares at
a considerable profit of nearly $1 million.
By the age of 32, after five years of experience on Wall Street, Baruch had
accumulated $3.2 million in wealth and was gaining a strong reputation on Wall Street
as a successful speculator. In the summer of 1902, he cashed out of the market and
traveled to Europe to contemplate his future of either staying in Wall Street or pursuing
a law or medical degree and career, which were two areas of study he had always
considered. He decided to stay in Wall Street due to his successes, and in August of
1903, at the age of 33, he retired from the firm of A.A. Housman & Company to trade
exclusively on his own, as he found it crucial to his success to play a lone hand.
What he actually discovered was that he traded less and paid less attention to the
minor daily fluctuations of the market and started concentrating more time in
constructive enterprises and investments in certain companies and industries. This is
where he would begin to succeed in ventures that would earn him a reputation as a
skilled financier, as well as a successful stock speculator.

The Birth of a Speculator

One example of how he succeeded was when he began looking for new opportunities
and started studying rubber companies, due to the increasing popularity of the
automobile at the time. He began purchasing shares of Rubber Goods Manufacturing
during the Rich Mans Panic (as it was so called) of 1903. He then would look for
other industries that would benefit if one strong product group was favorable at the
time. This purchase of Rubber Goods Manufacturing led him to own, and form with
other investors, the Continental Rubber Company, which eventually became known as
Intercontinental Rubber Company. He eventually sold out his position for a substantial
profit.
In early 1904, Baruch heard that the Soo Line was planning on increasing its wheat
traffic by building a new rail line westward. He conducted extensive research and
began buying at between $60 to $65 per share. Gossip began circulating that the lines
potential would not be as great as originally thought. Baruch ignored this outside
chatter. He was determined not to be deterred by outside influences and opinions, as he
learned this lesson a few years before. A bumper crop of wheat came along, revenue
for the Soo Line increased 50 percent, and the stock jumped to $110 per share. He
furthered his study of the company, revisited its prospects, and found the results would
not support the increased price in the stock. He then sold his shares before the stock
broke.
Baruch attributed this profitable transaction to superior research and study and his
increasing experience in understanding the price actions of stocks. It pays to be able to
change your views and not become emotionally embedded in one direction (bullish or
bearish) or another when it comes to stocks. This transaction proved how through study
and research Baruch would take action based on what he believed to be the facts. His
swift change of direction, when he thought the conditions changed, were key reasons
why he was successful with the Soo Line transaction.

Success and Power

By the age of 35, Baruch was an established speculator and millionaire, and he was
building a reputation as a successful financier. He became incredibly wealthy at a
young age by learning not to repeat the mistakes of his early years and through hard
work, constant research, and study.
Baruch was unaffected by the crash of 1907 by staying attuned to the action of the
market, and in fact, even contributed $2 million during the crash. He donated $1.5
million to the Bank of Manhattan Company to assist in the liquidity crisis that the crash
had caused, and he also lent $500,000 to the Utah Copper Company so they could meet
their payroll needs and not disrupt their business operations.
His dealings on Wall Street gave him an intimate knowledge of the personal
character of many of the business leaders he had to deal with during his later endeavors
during wartime. His Wall Street experience served him well in all his endeavors and in
life in general. Baruchs father was a prominent physician and a large influence on
Bernards life, and he had been thinking of leaving Wall Street in pursuit of more noble
causes as opposed to just making money trading in stocks.
Through his many contacts as a successful businessman, Baruch left Wall Street and
went into public service as World War I broke out. He served as chairman of the War
Industries Board and was called by President Woodrow Wilson to Paris to assist in
drafting the peace treaty. When he was asked to serve on the War Industries Board by
President Wilson, Baruch sold his seat on the exchange and all shares he held in
companies that could possibly benefit from any government contracts in order to avoid
any conflicts of interest.
Following his public service duties after World War I, he discovered public service
more satisfying than just trading stocks and making money. The experience he gained
from World War I changed his thinking. He became a member of the Advisory
Commission of the Council of National Defense. His responsibilities were to see that
raw materials would be available for the United States preparedness program. He later
also worked in public service under the administration of President Theodore
Roosevelt. His reputation earned him the ability to serve as a counselor to many of
those in power. He actually held appointive positions in four Administrations, and he
served as an advisor to six different presidents. One of his other high-ranking posts was
that of the head of the American delegation to the United Nations Atomic Energy
Commission in 1946.
Though he was said to have left trading on Wall Street when he entered public
service, he actually kept his attention to the market by observing it and trading, though it
would not consume his full-time attention. It seems the balance of trading in stocks and
serving his country was something that satisfied him. He still was a rather large
participant in the markets by most standards, as his trading records show his winning
positions in 1925 (a strong year for the stock market) producing more than $1.4 million
and his losing trades amounting to a little more than $415,000. Notice how he kept his
losing trades to a manageable level when compared to his gains. In the choppy market
of 1926, he managed a net profit of more than $457,000.
In 1928, as the market was shooting straight up, Baruch moved his offices closer to
Wall Street. He was very bullish concerning the business climate in the United States
during the mid- to late 1920s. As increased speculation was widespread and growing
throughout 1928 and 1929 and prices were rapidly rising, Baruch was very active in
the market. He was, by his own account, mostly out of the market before the crash,
noting that he had become uncomfortable with the almost uninterrupted rise of stock
prices. It is said that he saw the top of the market coming in October 1929, though some
of his records do show he was still buying stocks during and throughout October of that
year, even after the first major sharp breaks in the market had occurred. His records for
1929 did show a trading profit for the year of more than $615,000 (though this would
not have reflected stocks he had not yet sold as of the end of that year).
After the first big breaks in the market, Baruch seemed more confident that the
worst was over and mentioned to many that the financial storm had passed, as he kept to
his bullish outlooks on American business. Reality of course was that the worst was far
from over and depression periods would linger for some time. It is estimated that at the
markets top in 1929, Baruchs net worth was somewhere near $25 million. He did,
however, not seem to be too terribly impacted by the major decline in the market from
late 1929 to the middle of 1932, when the market finally bottomed at 41.22 on July 8th
(the market peaked on September 3,1929 at 381.17). This can be supported by the fact
that his lifestyle had not changed much, as he continued vacationing and donating to
political causes, etc.
Even in the mid-1950s, Baruch (then in his eighties) was said to have spent time on
the phone with his brokers, placing trades here and there for 10,000 shares at a time
and watching the tape for hours. He would still be called upon by many to give his
assessment of the current market. He would usually respond by saying that nobody
could predict the stock market and that he certainly was not going to try.
Throughout his career, Baruch was very good at managing the personal fortune he
attained, and during the late 1940s he began giving generously to universities and
medical institutions in honor of his fathers medical career and commitments to the
medical profession. These donations were made to further the research and advance of
the study of physical medicine. His incredible financial success also allowed him to
purchase the famous Hobcaw property in South Carolina. He owned 17,000 acres, and
many of his guests at the estate were U.S. presidents and other dignitaries. It is stated
that the estate he left behind was valued at more than $14 million, and that he had given
away to a variety of causes nearly $20 million over his lifetime.
Baruch wrote about his life with the publication of his book My Own Story, which
published in 1957 and became an instant bestseller. He lived a full, satisfying, and
rewarding life and died in 1965 at the age of 94.

The Baruch Approach

Baruch took an intelligent approach to the market. One of the skills he believed is a
requirement to be honest with yourself and expect to be wrong as many times as you are
right. He is often quoted saying No speculator can be right all the time. In fact, if a
speculator is correct half of the time, he is hitting a good average. Even being right
three or four times out of ten should yield a person a fortune if he has the sense to cut
his losses quickly on the ventures where he has been wrong.
He also talked about selling to the sleeping point as someone once told him. This
means selling stocks if they keep you awake at night worrying about them. You need to
use your subconscious mind to tell you to sell so you stop needlessly worrying.

Do Your Homework and Get the Facts

Baruch also believed, as did Livermore, that the way to truly succeed in the market was
to devote oneself full time to the task. Because of the extreme challenge, one must
commit full attention to it. He viewed it as no different than trying to be a successful
doctor or lawyer. You simply must devote yourself full time to the study of your craft.
The market, like any worthwhile pursuit, required an extreme amount of vigilance.
He thought that the stock market did not determine the health of the economy but
rather that it reflects it. The ability to understand this and react to it is a must skill. He
believed that stock prices reflect the economic facts and that overoptimism, as reflected
in bullish high prices, is even more dangerous than pessimism because caution is
ignored. This he experienced firsthand during the mid- to late 1920s. This means that
bears are as significant as bulls in an efficient market because they restrain the extreme
optimism and provide a balance to the market. The skill here is knowing in which
environment you are participating. For Baruch, as was the case with Livermore, he
would trade both sides of the market, depending on the conditions at the time. This
flexible approach served him well, as he would profit from both being long and short.
Baruch discovered through experience that it is an essential skill for the successful
speculator to be able to react quickly to the changes the market constantly produces.
This proved meaningful when he learned how a bull market could break quickly once
the continuity of thought behind the current market trend is broken. He believed that
there is no sure investment and that one could not count on an investment to be absolute
and unchanging. For this, the speculator needs to be reactionary, as the market is
constantly changing.
This has been repeated throughout history in the market. The stock market basically
reflects the current economic activity and the expectations for future economic activity.
Therefore it is crucial to stay attuned to changes in industries and companies that either
create new industries or improve on existing industries.
For example, in 1898 the market had 60 percent of its issues on the big board in the
railroad industry. By 1914, this declined to 40 percent. In 1925, it declined further to
17 percent and by 1957, railroads consisted of only 13 percent of all stocks. Fast
forward to today and railroads of course consist of only a handful of issues and
represent a very small minority of all stocks listed on the exchanges. Todays stocks
consist of many different innovative industries such as biotechnology, semiconductors,
electronics, and many other leading technology industries. This proves the market
always changes and adapts to new ideas and innovations. The shrewdest traders
throughout history all adapted the skill of reactionary change, as the market constantly
presents new and different opportunities.
Baruch believed that people behave according to the curious psychology of crowds.
As said by J.P. Morgan, the continuity of thought concerns how crowds react to
events. Education and status provide no advantages during these events. These crowds
reactions caused the frenzy of the rising prices of the late 1920s, which eventually led
to The Great Crash. So it doesnt really matter how high your IQ might be or what
status you might have attained in some other profession, the market reacts indifferently
to participants and doesnt really care who you might be as an individual. This
understanding of psychology and its impact on the market was a key discovery for
Baruch in his quest for profits.
Baruch also understood that what drives the prices of stocks is the human reactions
to the economic forces and changing events presented and anticipated. The key to
successful stock trading is the ability to separate ourselves from our own emotions.
Baruch struggled with this also, as most traders do, but eventually he learned how to
control the emotional aspects through his experience and trading rules. Without control
over your emotions, there is very little chance for profitable success in the stock
market.
Bernard Baruch described the stock market as the thermometer and the economic
environment as the fever. The market does not cause economic cycles but merely
reflects them and the judgments of what traders believe business and the future will be
like. He believed the keys to the strength of economic conditions were a strong national
defense and a strong national credit. The ability to understand the relationship between
the market and the economy and how the market really works is a required skill for
survival and success in the market.
He was a firm believer in judgment and thought. Baruch believed that information
without judgment and thought was of little value. And he felt that in order to have good
judgment one must have the big picture in focus. He also likened alertness and the
ability to make non-biased judgments as keys to success in the stock market.
His views on determining the reasons why so many people lose money in the market
is that they think they can make money by not working for it. He believed that most
people view the market as the place where the miracle of great and quick riches can be
performed with little effort. However, he proved that the market is not a place to expect
riches without the required sacrifice that the market demands. When the market did
provide profits for him, he made sure to become more humble as the market kept going
his way. This pliable trait provided a balance for him so he would act in a prudent
manner when it came to making the right trading decisions.

Custom-Made Discipline

Baruch became disciplined in his approach to the market after early experiences
produced many losses. His number-one discipline was to never buy on tips or inside
information. Relying on that kind of information produced some early losses for him,
including a major loss on American Spirits. From that point on, he was sure to rely only
on the cold, hard facts. He was a firm believer in doing your own research and finding
out everything you can about the company, its management, its competition, its earnings,
and its future growth possibilities. Self-reliance and doing ones own thinking was a
must.
Baruch believed that you simply must get the facts of a situation before you act and
commit hard-earned money to a transaction. He warned to always be on the lookout for
tips from even the least-expected so-called stock experts. He recalled once in late 1929
a beggar to whom he would give gratuities to on a regular basis, telling him one day
that he had a stock tip for Baruch to act upon. This event is similar to one often
associated with Joseph P. Kennedy, a very successful stock speculator during the 1920s
and father to former President John F. Kennedy. Joseph P. Kennedy mentioned that at
one time during the great rising market of 1929, before the crash, a shoe shine boy had
offered to give him a stock tip. Kennedy was sure that the market must have been near a
top if shoe shine boys had become stock market experts by offering buying tips. The
thinking here is that if everyone is invested in the market there is no more room for
upward rising prices if all the demand has been met. Of course the events of the beggar
offering advice to Baruch and the shoe shine boy offering tips to Kennedy happened to
occur right before the Great Crash of 1929. Both Baruch and Kennedy had liquidated
many of their positions before the crash devastated most portfolios.
Baruch did not believe that one needed to diversify too much, but that it was better
to have a few stocks and to watch them carefully. He thought that one could simply not
know all the relevant facts concerning too many stocks at one time. Focus was also a
key skill he discovered that led to his success in the market. He believed that traders
should focus on one thing at a time. He thought no one could be an expert at too many
things. He liked to focus on one thing at a time, perfect it, and do it well.
Like Livermore, Baruch would do an analysis of all his trades to see if there were
changes that needed to be made in his approach to the market. He also used this
analysis to discover mistakes he had made so he could avoid making those same
mistakes in the future. He started this early in his trading career. To do a thorough
analysis and not become distracted, Baruch believed in removing himself as far away
from the market as he could at times. This would mean leaving New York for getaways
and liquidating his positions when necessary. He would actually take annual European
vacations each summer. It is often mentally healthy to totally escape the activities of the
market and use this down time to reflect on ones past transactions. Livermore also
discovered how valuable this time away from the market was to him, as he would take
many vacations to escape and recharge himself for his return to the markets. For
Baruch, this time away was important so he could have the peace of mind and
concentration to reflect on his transactions.
One discipline Baruch learned early after his mistake in American Spirits was to
never invest all your funds, but to keep a good supply of cash on hand in a reserve. He
did this to avoid betting his entire stake and going broke when things went against him.
He also wanted a cash reserve, especially at the bottoms of market declines, so he
could benefit from the eventual rise in the market that he knew would always come.
This capital reserve would then be available for him to take advantage of those new
opportunities.
Baruch knew the rewards of hard work, and he disciplined himself to the task at
hand. He knew it required hard work to get the right information in order to make
intelligent trades. The market demands vigilance, and he applied his efforts to his
greatest abilities.
Learning from experience, he found it best to keep silent about his positions and
trades, and he believed it was best to trade alone. When he decided to retire from A.A.
Housman & Company and go out on his own, Baruch did so because he thought it was
best to trade alone and remain focused in order to achieve the greatest profits.
He found through his years of trading that the two main mistakes that contributed to
his early losses were the same mistakes he believed that most investors make, which
were:
They know too little about the companys management, earnings, prospects, and
possibility for future growth.
They tend to trade beyond their financial capital capacity.

These were the mistakes he made that caused him to lose his entire capital many
times. He vowed to discipline himself to learn from these, and that was one of the
reasons he became so committed to the extensive research he would conduct on the
companies he was interested in investing in.
Baruchs understanding of financial statistics lent quite a bit to the interpretation of
the fundamentals of the companies he was studying. Today, we would say that Baruch
was more of a fundamentalist type of trader than a technical trader. In evaluating the
fundamentals and general qualities of a company, he would look at three main areas:

The real assets of the company. Its cash and properties.


That it must perform or produce something that is needed.
That it must have good management.

He would discipline himself to check the company, especially its management, and
the financial prospects before entering a trade.

Facts and Rules

Baruch was a disciplinarian who would research and stick to the facts rather than have
a long list of trading rules. Of the trading rules he did develop and follow, however, he
noted that cutting losses quickly was a must rule he learned through experience. Just as
all the great traders in this book acknowledged, this was a crucial rule in protecting his
capital and allowing him to accumulate his wealth throughout his lifetime.
When selling stocks, Baruch would many times sell his shares as the prices were
rising, just as he did many times in 1929. He sold 121,000 shares of stock he held in the
sulfur industry just before they peaked. By the time the crash occurred in October 1929,
he was completely out of these holdings. One reason he retained his fortune was his
ability to sell shares on the way up. He believed nobody could sell at the top and buy at
the bottom. This feel he attained, especially after many years of experience, often
caused him to sell when he felt prices rose too high. He did not seem to have specific
rules of when prices were too high, but he developed more of a sense that one gets
when they trade for many years and follow the market with intense study.
The other rules he followed came from mistakes that cost him in prior transactions.
He made a mistake in 1906 when he entered the commodities market and bought coffee
(which he did not know abouthis first mistake), and as it started to drop in price he
was told to hold on (another mistakelistening to others). He held on and watched it
continue to drop. He made still another mistake by selling his other large holding at the
time in Canadian Pacific stock, which had shown a growing profit. He sold these shares
to raise more margin money for the coffee position. After he finally sold the losing
position in coffee, he realized a loss of almost $700,000. Baruch reported feeling
physically ill after this trade. He made a resolution to never trade in something he did
not know about and to cut all his future losses short and to let his winners ride. He also
realized how damaging something like that coffee experience could be to a traders
confidence.
Baruch always believed that it was much harder to sell stocks correctly than it was
to buy them correctly. He noted that, because of the emotional aspect of trading, if a
stock went up, the average investor would hold because he wants more gainshes
exhibiting greed. If the stock declines, he also holds on and hopes the stock will come
back so he can at least sell and break evenhes hoping against hope. Baruch worked
hard to avoid the impact these emotions can play on a trader, which can be very
damaging. His rules were to sell stocks on the way up, and if the stock was declining,
he would quickly sell and realize his loss.
He sold several times in 1928 as the market was climbing to record highs. As
stocks kept rising he would come right back into the market and purchase more. This
trading behavior proves how important it is to follow what the market is currently
doing as opposed to following what one might personally think the market should do.
By August 1929, the market was rising so fast that Baruch would buy stocks on strength
one day and then sell them the next day. His trading rules were letting his judgment and
the actions of the market dictate to him what actions he should take.
Carefully following the strategies he implemented during his career and being
disciplined in his trading allowed Baruch to become a very wealthy and important
figure in the business world, and then to realize personal satisfaction in serving his
country and being a trusted advisor to several U.S. presidents.
3
GERALD M. LOEB

What everybody else knows is not worth knowing.

The Skittish Trader

Born in 1899, Gerald M. Loeb started investing in 1921 when he was working in the
bond department for a brokerage firm in San Francisco. He did not take to sales very
much, and he started reading everything he could on speculation, investing, money, real
estate, and economics. He started investing with an inheritance of $13,000 from his
father as his capital account. As his interest in stock trading began to grow, he found he
also liked writing and wrote some briefs concerning financial statistics and bonds that
were published in late 1921.
In 1923, Loeb took a substantial loss in proportion to his capital, and just like the
other traders weve profiled he used that lesson to help him become more successful by
learning from his mistakes. He then landed a position as a stockbroker with E.F. Hutton
& Co. and moved to New York in 1924, where he stayed, eventually became a partner,
and later vice-chairman of the board after it was incorporated in 1962.
He made a name for himself as a newspaper columnist and market writer, as
articles he had published were featured in Barrons, The Wall Street Journal, and
Investor Magazine. In 1935, Loeb wrote his popular book The Battle for Investment
Survival. The book sold more than 200,000 copies in its first printing, and due to
reader demand was updated in 1957. In 1965, Loeb again updated the book with
additional information, though practically no changes were made to the basic strategies
that first appeared in the 1935 original.
When The Battle for Investment Survival originally was due to hit the bookshelves,
another popular investment book was also coming out. Benjamin Grahams Security
Analysis has been considered the bible for the buy-and-hold investor, as Graham was
deemed the father of value investing.
Graham and Loeb couldnt have come at the market from more opposite
approaches. These two differing styles had contrasting opinions as to which way of
investing in the market was the more prudent and profitable. Though there have been
many successful value investors over the years, the most famous of course being Warren
Buffett, Loeb himself amassed millions in the stock market during his lifetime.
While Buffett is viewed by many as more of a long-term investor, due to his style of
investing in stocks and companies and holding them for many years, Loeb viewed the
stock market as more of a battlefield. He believed that the battle for profits was far too
risky to hold stocks for long periods of time, as the title to his famous book depicts.
This view came about over the many years he was investing, as he witnessed the Crash
of 1929 firsthand. The events of the Crash proved to him that holding onto stocks, and
ignoring the sell side, can have a devastating effect on ones portfolio.
Loeb, by his own account, was mostly out of the market before the Crash. An astute
trader, Loeb had discovered that the top of the 1929 market actually occurred on
September 3rd, almost a full two months before the beginning of The Great Crash. The
experience of the Great Crash made Loeb a skittish trader for the remainder of his
career, as opposed to a long-term investor. In fact, Loeb wrote a follow-up book titled
The Battle for Stock Market Profits in 1971; published some 36 years after the
publication of his first book, he still viewed the market as a battlefield.
His style consisted of taking advantage of trends in the marketplace, buying and
selling at key points, taking quick profits, and cutting his losses short. He thought that
most people give the market no thought or study, or at least not the amount of effort it
requires. Like Baruch, Loeb believed that most people look at the market as a way to
gain quick riches. Loeb felt that this view was why most people fail at stock
speculation, and his views matched the feelings that Livermore and Baruch had toward
the psychology of investors. All three men believed that this nave perception of the
markets was what led to failure for most investors.
Loeb also believed that knowledge through experience is one trait that separates
successful stock market speculators from everyone else. It was the experience that came
to these great traders, who continuously learned from their failures, that ultimately paid
great dividends down the road during their trading careers.
After more than 50 years in the investing battlefield and the success and wealth he
accomplished during his life and career, Gerald Loeb definitely deserves the distinction
to be labeled as one of the greatest. He withstood the test of time through many and
varied market cycles. Unfortunately, his publications do not identify the specific trades
where he made his fortunes, but nonetheless, he did detail the rules that contributed to
his success.

Loebs Keys

Loeb believed that the best stock market speculators need certain skills and knowledge
to produce outstanding results. He believed in taking things more slowly and starting
gradually. You need to assess your strengths and weaknesses, and this requires knowing
yourself and your limitations, he noted.
Loeb, just like Livermore and Baruch before him, also defined speculation and
distinguished between speculating and investing. He said that speculating is a careful
study of the facts and reducing the risk by education and experience. As one gains more
experience in the market, the value of that experience translates into knowledge, and the
knowledge gained dictates what works and what does not work in the market. In the
stock market, facts work, and the greatest traders know this.
Contemporaries in the markets, Loeb did get to know Bernard Baruch. Baruch who
once wrote him stating, After you have the facts, examine yourself as to whether you
have prejudices or not, and then use your own judgment. Baruch, as mentioned earlier,
used the word speculator because he felt there was no sure investment. To him,
application and diligence were the keys to success. As for Loeb, he decided that if you
want to accumulate capital you must speculate and not invest. Investing was putting
your money away and getting a return. Speculating was taking a calculated risk based
on an intelligent estimate of future possibilities. He also thought that with a great deal
of understanding, observation, and study, one could be very successful not by merely
buying a good fundamental stock and holding it forever, but rather by staying attuned to
the market changes and taking advantage of those changes.

Quickness and Discipline Pay Off

Loeb believed that short-term trading (holding a stock between 6 months and 18
months) was much more profitable than long-term investing because it would force you
into the right stocks at the right time. Loeb thought it nearly impossible for someone to
predict what the market was going to do at a point well into the future. Like the weather,
it was easier to predict what might happen tomorrow or the next day as opposed to
many months down the road. This take on the market caused Loeb to become a skittish
trader. He would dart in and out of stocks as the market dictated.
The changing elements of the market were also very important to Loeb, as the
earlier the change in the trend was detected, the more profits could be realized if you
observed and acted appropriately to take advantage of those changes in trends. Because
the market is really reflecting the supply and demand of investor expectations, and many
participants might have differing views on those expectations, changes in price trends
will always occur. Its the ability to detect and act on the more meaningful changes, in
the appropriate time frame, that can separate the really great profits from the mediocre
profits.
Change was also a key skill to life as a speculator. The ability to change and seek
out changes will greatly enhance your results, as stocks and market cycles change all
the time, though they do seem to follow historical patterns. Though change is difficult
for many people, it plays a crucial role in the life of a great stock trader. The ability to
understand historical changes is also a vital skill, as the market has proven that certain
patterns over time repeat themselves.
Loeb was a hard worker throughout his life, and he believed that hard work was a
requirement to succeed in trading. He also believed that to do well in short-term
trading, it took someones full-time attention and dedication, just like Livermore and
Baruch before him believed.
Loeb was a tape reader, similar to Livermore, and he believed that luck played no
part in the success or failure of a trader. Rather, it is knowledge and a premium ability
that lead to success. The amount of time devoted to understanding the markets would
directly relate to your outcome. He thought that the market must be studied just like any
other profession or endeavor. He believed that very few people would ever attain the
highest success in stock trading, just like very few people ever attain the highest ranks
in any other field, be it medicine, sports, music, science, or any other.
The best traits for successful speculation are knowledge, experience, and judgment.
Loeb found that the best traders are usually psychologists and the worst performers are
usually accountants. Accountants usually produce terrible trading results because of
how they are trained. For example, accountants typically would put a certain value on a
stock based on a certain P/E ratio or a certain book value. A certain (usually low) P/E
ratio, they might concur, would indicate that the value of the stock might be low and
should be considered as a possible buy candidate. But Loeb believed that the market
really doesnt work in such a scientific way. Just because some set formula might
indicate that a stock should be purchased doesnt necessarily mean the supply and
demand that follow that purchase will reflect that value. As Loeb would show, this
thinking can cost a trader serious profits. Loeb argued that you must trade with the
actions of the market and not simply by how you might think the market should trade.
You might think that certain low P/E ratio stocks should be bought due to a formula that
rates them as undervalued in price, but the market might not think and behave in the
same manner. If you purchase these stocks just because you adhere to a certain
valuation formula and the market decides to value them differently after you purchase
them, and you do not cut your losses short if the stocks decline in price, you could lose
significant amounts of your capital if you still believe your formula should have been
correct.
Loeb did not believe in paper trading, as he thought this removed the emotional part
of investing, which is the most difficult part to overcome. You simply will not have the
same emotional issues when you paper trade versus actually putting your hard-earned
money on the line.
He noticed how psychological influences played a great part in setting market
valuations. He showed how stocks would normally make new highs when the greatest
number of people would visualize its greatest possible value, and not necessarily at the
moment when the companys highest earnings or highest values are actually achieved.
He, like those before him, thought emotions needed to be restrained and should play no
part in trading decisions. Rather, trading decisions should be based on great
opportunitiesas opposed to hopeful situations and dreams. To take advantage of those
situations, successful traders need to rely on solid trading rules instead of emotions.
He noticed that stocks, and companies for that matter, act like human beings. Stocks
go through the same stages and phases as people do, including infancy, growth, maturity,
and decline. The key in trading is to be able to recognize which stage the stock is in and
to take advantage of that opportunity. This meant getting a deep understanding of the
psychology of the market. The key place to be for the best profits is in the growth stage.
Because people make prices and behind prices are profits, profits therefore are shaped
by people. The actions of people and profits ultimately drive stock prices either up or
down.
Because of the heavy human impact in the market, Loeb learned to stop being an
analyst and became more of a psychologist. For example, every stock he owned in 1927
was based on fundamentals. Even though, through thorough analysis, he thought they
were overvalued and then he sold them, these stocks kept moving up in price. Due to
the continued rise in prices, he bought back in as the market was in a strong bullish
stage. The psychology of the market was showing him that investors were in a buying
frenzy and that classic analytical tools, if followed, would have kept one out of the
market, due to historical valuation models not supporting the current high prices. This
taught him how important it is to know how excess and mob psychology work,
especially when it comes to the stock market. He also noticed how it didnt matter what
he thought, as the market was going to come to its own conclusions concerning whether
stocks were overvalued or undervalued.
Key qualities that Loeb felt were important for the successful trader to have in the
complex environment of the market were:

Intelligence
Understanding of human psychology
Flair based on pure objectivity
Natural quickness
Originality of thinking that remains logical

It was also important to understand your own thinking and to beware of the dangers
that bull markets can do to your thinking, such as:

Thinking you are smarter than the market


Getting more aggressive in your approach

He found that great successes could lead to overconfidence, which would end up
doing considerable damage if not contained. It is important to be confident, especially
in the market, which looks uncertain most of the time. But Loeb felt it also was
important to manage confidence levels to avoid getting out of control. This, of course,
takes a great amount of discipline and self-control.
Also, great dangers can occur by not knowing at what stage or cycle the market is
in. Most bull markets are recognized by the majority of investors and traders well after
they have started. Most end when everyone is excited and overvaluation is
considerable. Being able to actually know the exact stages of the market as they are
occurring is crucial in being able to stay on top of the market and analyze its moves and
direction as its happening. This quickness is required in order to be ready to react to
the direction of the market when it changes and to be one of the first to discover the
change.
To trade successfully, Loeb knew that one must focus on price and volume action as
key determining factors. After all, volume is the decisive determinant of demand, so it
is crucial to show the balance and relationship between the two and how they interact.
To be one of the very best that truly succeed, Loeb believed you need to:

Aim highhave ambitious goals.


Control the risks.
Be unafraid to keep uninvested reserves and be patient.

Loeb viewed the stock market as more of an art than a science. It is also very
complex, as American and global economies are very complicated and involve many
participants. This only supported his strong conviction that full-time attention and
constant study are required to succeed in the market.
The best speculators know in their own right and have a rare art of understanding
how to utilize and profit from their own knowledge and information from others. They
have intuition and judgment that tells them when to actively participate and when to
stand idle on the sidelines. They have a feel of when to be brave, when to retreat,
when to add to rising positions, and when to cut losses shorter and shorter over time.
They know when to be patient and impatient, when to be in and when to be out, and
when to trust their judgment.

Discipline in Battle

Loeb believed that discipline is a very important requirement for achieving success
over the long run in stock market trading. After all, the battlefield of investing requires
strict adherence to sound disciplines.
One of Loebs first and most important strategies was to understand and know the
current general trend of the market. Once you have a good feeling for what stage the
market is in, then you can proceed with rules for buying and selling stocks.
One of the widest differences between the successful investor and all others is the
ability and discipline of the successful investor to be out of the market when it is not
acting right instead of trying to constantly trade in a dangerous market. This takes
considerable self-control, a vital asset to the successful trader. Many traders find out
the hard way that overtrading, and especially trading against the market, is a losing
strategy. Loeb thought it was better to do nothing in a bear market than to take a chance
on doing something wrong. In a bull market the reverse is usually true. It can be a huge
opportunity cost not to have cash ready to take advantage of the next upturn.
If markets were narrow and not showing clear signs and if the news were the
determining factor, such as war, he would do nothing and sit on cash. If he did trade in
those environments it would be in small amounts and transactions. It is important to
have a cash reserve ready because it is difficult to know when the next upturn will
come. Keeping a cash reserve and being out of the market keeps your confidence and
emotions intact. Loeb would sit on cash for long periods of time just waiting for the
right moment. He would also hold only a few particular stocks at any one time. This
allowed him to focus on those issues and watch them very closely. His cash reserve
was his ammunition for future buys. The cash reserve is a must for the successful
speculator. It must always be ready and available for the next opportunity.
Loeb believed in concentration as opposed to diversification. He was a strong
believer in not overdiversifying. He thought it was better to have a few concentrated
stocks and watch them closely. Put all your eggs in one basket and watch it very
carefully, he often said. He thought that to diversify your assets over many types of
investments and stocks would not produce the same results of concentrating, focusing,
and knowing your stocks as well as you should.
This thinking went against all the other popular advice given in those days and still
today. Loeb also believed that the more experienced and successful you become, the
less you should diversify. He made all his money and success by concentrating on a few
leaders of the day and watching their action very closely. This again is a hard
discipline to implement, especially in a strong bull market when many stocks are racing
up in price. But as Loebs experience taught him, the big money was made in the
leaders.
Loeb believed traders should set the return goals for themselves very highfor
example trying to double their capital in 6 to 18 months. He believed that the very best
speculators want to make a killing in the market. You simply must discipline your mind
in setting goals at the highest levels. He believed that speculation is for large gains and
not for income returns, but you need to measure and reduce the risk to as low as
possible. This again relates to his strategy of holding or trading only a few stocks at any
one time. This forces you to concentrate on a few issues that you know well and time
your purchases at the minimum risk level.
Another key discipline, one that we saw in Livermore and Baruch and one we will
see in Darvas and ONeil as well, is the practice of evaluating your trades after the
fact. Loeb would review his losing trades to keep himself learning and to avoid making
those same mistakes in the future. Putting your spotlight and attention on your failures is
a sure way to succeed. Understanding your mistakes is vital to trading success. Loeb
would write down his reasons for making a trade before he made the trade. This would
discipline him and move him away from impulse trades. He wrote down the pros and
cons of a trade and how much he would expect to make beforehand. This also helped
him in his selling. He believed that if you write down your reasons for buying, and then
if the stock doesnt work out or changes later, that would be all you would need as a
reason for selling. Lack of this disciplined proactive procedure is a large reason why
so many traders fail. They simply ignore why they bought the stock in the first place,
and they dont sell the stock when those reasons prove otherwise. He called this his
ruling reason. He created checklists to write down reasons why you should buy a
stock. They would include:

Fundamentals
Valuations and trends (P/E ratios, historical growth rates, etc.)
Objectives and risks
General information

These reasons would help him to keep his emotions in check and discourage
impulse buying, as he would discipline himself to just follow his reasoning rules.
Because Loeb believed that all securities are speculative and risky, he thought
traders needed to be able to do their own analysis and make their own decisions. You
should not listen to any other opinions or tips, but rely only on your own judgment. You
need to be able to judge the action of the market cycle. And you need to be able to judge
your own stocks within the context of the general market. You also need to be able to
decide if the market is in an accumulation, distribution, or somewhere in the middle
stage.
He believed that success in trading is measured in three dimensions:

Risk
Reward
Consistency

The key was to control the risk and seek the highest returns with a consistency in
your rules and strategies. As you learn from your mistakes, you will develop rules that
will begin to work. Its important to refine and add to your rules as you find what works
and what does not, but its also important not to keep changing strategies for each and
every different cycle. For example, it doesnt do any good to be a value investor one
day and then a growth investor the next.
Loebs selling rules included the basic premise that traders should always close a
trade when a good reason exists to do so. This discipline usually separates short-term
traders from long-term investors. Dont ignore sound market sell signals and hold on
just because you think youre a long-term investor. This philosophy could be very
costly (as we have seen since the dramatic bear market that began in the spring of
2000). Those investors who ignored the classic sell signals of the market and held on,
or are still holding on, to fallen leaders have no doubt paid a huge price as the value of
their portfolios has been reduced sharply over the past few years.
Loeb would also not sell stocks based solely on tax considerations. The more
prudent and profitable way is to sell when the stock and/or the market gives signals to
sell, and then pay the profits on the gains regardless if they become higher short-term
capital gains or lower long-term capital gains. The key is to not let the change in the
short- or long-term tax rate influence your sell decisions. He also thought stocks were
the best hedge against inflation if they were purchased and sold at the correct times.
Because he was a tape reader, he thought that following the price movements were
the key to stock action. The early stages of a market move are the best. Usually the
strongest stocks will show strength before this occurs. That is why it is important to
keep studying the market. These early movers will normally make new highs before the
averages do and end up being the real leaders, providing the best price increases. He
found that it was best to start worrying when stock prices are very high, when most
investors are overly optimistic, and when everything in the market seems perfect. This
was similar to what Livermore and Baruch believed, and it led them to do their selling
into the strength while stock prices kept rising. Loeb also discarded the hype of P/E
ratios as the prime measure for buying stocks, and he found they were rarely useful and
presented, in general, an emotional reaction. He didnt give much credence to them as
far as buying a stock, but he would analyze them, especially as stocks rose to high
levels.
Another discipline Loeb believed in was advising traders to check the new high and
new low lists. He thought that stocks that make new highs and quiet stocks that start to
creep up in price and develop positive signs on higher volume were the best candidates
for further study. This will automatically steer you to the new leaders to contemplate for
new purchases. Get in the habit of scanning the stock tables looking for advances of one
point or more on higher than normal volume. These are the stocks that are showing
developing strength.
Loebs many disciplines allowed him to ride through the 1929-1932 bear market,
making money every year. He was a strict disciplinarian, and it was one of the biggest
reasons why he avoided many losses and produced incredible gains.

Rules of the Perfect Trade

Loeb perfected his trading rules over the more than 50 years of his trading career. He
used margin when he was young and encouraged using it during the younger years of a
traders career.
His first trading rule for success is the ability to accept losses, cut them short, and
move on if the stock moves against you. This was his insurance policy to protect against
large losses. Just like Livermore and Baruch before him, his rule was to limit his losses
to no more than 10 percent. This was his absolute maximum and a rule that he could
simply not ignore. This is the one vital rule that should be automatic and act as a
substitute for any emotions that always will come into play when a trade goes against
you.
William J. ONeil even mentions in his book, How to Make Money in Stocks, that
he had the opportunity to meet Loeb when he was writing his book The Battle for Stock
Market Profits. Loeb told ONeil that he hoped to be out of a trade long before it ever
dropped to 10 percent from his purchase price.
The benefit of experience will give the best traders a sense of when a stock is not
acting properly before it ever gets to their stated loss-cutting rule. You simply must be
able to take your losses quickly in the battlefield of stock trading to survive and
prosper. Loeb would repeat this rule over and over again in his publications as he
constantly stressed its importance in the arsenal of the successful trader.
Another important rule is to monitor the general trend of the market. The trend of the
market is so important that it also determines how certain other trading rules are
implemented and acted upon. When the market was heading up (as in the early stages of
an advance or just when the market was emerging from a weak environment), Loeb
would look for the active leaders and buy into them. He believed you should buy only
quality stocks if the trend is up, and you should limit your buys to the leaders of the
strongest industry groups.
Volume also was a vital signal and key trait. Strong up days on strong volume is
very bullish. Decreasing volume on up days in price is a bearish sign (up to a point).
He would constantly stay observant and use his experience. Though Loeb was not a
technical chartist, he was a tape reader of price action.
In a bull market it is always wise to pay up for an active leader. Loeb also looked
for new highs crossing a resistance level with correct timing of an upward-trending
market. This was the exact same strategy that Livermore was discovering in his trading
experiences.
Loeb also liked it when the major moves above these certain levels in price were
accompanied by large increases in volume. This again confirmed the demand for the
stock. This is why he believed in watching the price movement of stocks. He believed
that institutional holding and buying of certain stocks was an important element of a
successful stock and positive for future profits. He also looked for relative strength in
the leaders when the market makes a turn from a correction or reaction. This is a key
trait in helping to identify future leaders and proves the strength and conviction that
investors have in the stock.
The best stocks to buy and how much to buy is dictated by the action of the general
market. The best buy signal is when a stock moves up strongly on larger volume and the
stock is breaking out of accumulation stages. Loeb favored higher stock prices as they
usually kept rising, were the active leaders that could lead to big price gains, and had a
strong following. The best stocks will always seem overpriced to the majority of
investors. He avoided the cheap stocks, as they usually got cheaper. Low-priced stocks,
he learned through his trading, reflect bad value as opposed to a bargain value. Again,
this philosophy went against most opinions in the market in Loebs days.
Loeb also noticed that every new market cycle produces a new list of fresh leaders.
It was unusual for the former leaders to become the standouts during the next rising
market cycle. At the tops of market cycles, the main area of concentration and focus
should be on trend and action, as those will then dictate the price action and will
produce the new leaders.
Loeb, just like Livermore and Baruch, believed that smart traders would pyramid
their buys on new highs. This was akin to the probing and pyramiding strategy
Livermore introduced many years before. Loeb would pyramid up in increments to test
if his buys were correct. For example, if he decided to trade 1000 shares in a particular
issue, as he would always decide beforehand the total number of shares he was going to
invest in each particular stock, he would buy 100 shares on his initial purchase. Then, if
the stock moved up as he anticipated, he would purchase another 200 shares. He would
then add more shares to his purchases as the stock kept moving in the proper direction.
He kept on averaging up to his initial level of 1000 shares if the stock was doing well
and was still within the correct buying range. Again, all the great traders featured in this
book used this strategy as a key rule for attaining large profits.
Loeb also believed that stocks are always way overvalued in a bull market and way
undervalued in a bear market. He was guided more by trend in the market than by price.
He noticed through experience that the reason why low or high points are made will be
revealed many months later. It is the expectation, not the news itself, that moves the
market. This is why it is crucial to understand the time element of news and the price
adjustment reactions to news. The price reactions usually never happen at exactly the
same time. He noticed many times that market prices are usually also ahead of the
general news, business, and corporate developments. War is a good example of this. He
considered war or the threat of war as the greatest hazard for the investor. It tended to
cause the most uncertainty.
Loeb stuck to his sound principles and believed that a good tape reader depends
only on buys because of good action in the stock. He never traded on news alone, as he
used it to consider its relation to the tape action and not to the stock itself.
Loeb basically stuck to three basic elements in appraising the worth of a stock to
see if it was in a good position for purchase. They were:

Qualitygood fundamentals, liquidity, and good management


Pricebased on the rules presented earlier
Trendthe most important element and easier to detect than price

The trend is the most important quality, especially in the early and middle stages of
a higher trending advance.
One of the main fundamental traits that Loeb liked in a stock was good management
at a company, and top managers also had to have a solid ownership stake in the
company. He thought that the dominant mover of stocks was the earnings of the company
and the expectation of increased future earnings. He believed that this was the main
mover of a stocks price from the fundamental side.
As far as money management rules, Loeb would follow these, which he found to be
sound over his many years in the market.

Strive for ultimate gains of 1 to 2 times your capital in 6 to 18 months.


Professionals risk a maximum of 20 percent of their capital on one issue.
It is more advantageous to invest in an advancing issue at seemingly higher prices
than to attempt to discover when the bottom will turn up for a particular issue. To
the best traders the most expensive is actually the cheapest.

Loeb didnt have many sell rules when he was ahead on profitable positions, as he
relied more on his experience and his judgment. One of his favorite times to sell was
when he started patting himself on the back for being so clever and outsmarting the
market. This is almost always a huge mistake, and one you should be aware of. This
overconfidence has been detrimental to many a stock trader over the years. When you
start bragging about how great you are, the market seems to have a magical way of
bringing you back down to earth in a humbling manner.
He noticed that tops in stocks would usually occur when the advance in price stalls
as volume or activity increases, or if the prices decline and the activity increases. This
again comes from the focus and constant observation of the market and your holdings.
Loeb thought that the age and extent of an advance was an important element and
factor in his sell decisions. He would intend to sell his leaders that had been there for
two or three years first versus the ones that had just begun to move. He believed there
were exhaustion points in leaders that had advanced a great deal over that period of
time. Remember, Loeb was a short-term and skittish trader, so it would not have been
unusual for him to think in those terms.
Some sell guidelines he adhered to when he was in a bull market were:

Sell when you see a bear market ahead (in bear markets he would go to 100-
percent cash)
Sell when you see trouble for your particular company
Sell when time has offered a far better buy (weed yourself of laggards in your
portfolio and move on to new leaders)

He always believed that if your stock stops going up and begins to decline, you
should always sell your worst shares first and keep your best performers in your
portfolio. One strategy Loeb always advocated was to sell approximately 10 percent of
his portfolio at the end of each year. This rule would force him to weed his portfolio of
the weakest stocks and move his money into stronger positions if they presented
themselves, keeping the best performers and removing the stale stocks.
Some other sell signals he would look for was when the stock rose sharply on big
volume but ended the day at no gain or at a loss. This indicated a reversal of the earlier
strength in the stock and signaled a possible waning of the strong demand for the stock.
For example, Loeb saw the top in the Crash of 1929 as the leaders started to act badly.
When he moved out of them, forced out by their nonperformance and into other stocks,
and they to started to act badly, he noticed there was nothing else strong to buy. The
market action automatically kicked him out of his positions and told him there was
nothing desirable left to buy by its action. Also, he began to take his profits as they
began to diminish. He believed that selling was much harder to do than buying, and the
successful selling of stocks is what separated the men from the boys. The key to selling
is to be able to sell into the strength of the stocks that you already own and show a
substantial profit. You need to sell before its obvious to everyone else. This takes
extreme discipline and is a main trait of all those featured in this book.
The main selling rules that Loeb employed were basically the two listed below:

Cut your losses short at no more than 10 percent.


Prune your portfolio 10 percent at a minimum at year end. Sell your worst 10-
percent positions to weed out the weakness in your portfolio.

All other decisions he made when it came to selling were either based on
guidelines or were made on judgment. He learned through his many years that the more
experience you gain, the better your judgment will become.
Loeb believed that every stock will have periods when it will be the opportune
time to buy and when it will be a good time to sell. The selective buying and selling,
and the ability to spot these different times, is the key to the most profitable
opportunities and is usually a main reason why some profit and most lose in the market.
He identified three main reasons why many tend to lose money in the market:

Paid too much (not paying attention to the technical side)


Did not recognize a bad balance sheet (loss of focus of the fundamentals)
Misled by inaccurate earnings estimates (another fundamental item)

Another possible reason for selling is if a stock is going up rapidly and becomes
overvalued and splits because of its high price. This would be a strong signal for him,
as he noticed many times that this action would lead to price declines.
As for shorting, Loeb found it to be rarely successful (usually because most bear
markets are less severe in nature than rising or bull markets), but if you do want to try
shorting stocks, he advised following these guidelines:

Anticipate bad news (which is very hard to do most of the time)


Watch for unfavorable relative action such as breaking certain trend lines,
failures on rallies, and a downward overall trend in the market

He also advised to never short a stock because you feel it is too high priced. It is
better to let the action of the market determine if the stock is too high priced rather than
your own personal opinion. The fundamentals of the company should be weakening and
the stock should be making new lows before you consider shorting a stock.
Gerald Loeb detailed all of his skills, disciplines, and trading rules in the two
books he wrote on the stock market. His many years and successes in the stock market
are truly remarkable feats and should be studied by every aspiring trader who wants to
become one of the best.
4
Nicolas Darvas

As for good stocks and bad stocks, there were no such things; there were
only stocks increasing in price and stocks declining in price.

The Persistent Outsider

Nicolas Darvas is the only one of The Greatest Stock Traders of All Time profiled in
this book that did not start or even have a career in the brokerage business. Darvas was
born in 1920 in Hungary. He studied economics at the University of Budapest and fled
to Turkey during World War II. He came to the United States in 1951 and was part of an
international professional dance team (Darvas and Julia), when in November of 1952,
he was offered to be paid in stock instead of cash from one of the nightclubs his team
was going to perform at in Toronto.
The stock was a small Canadian mining penny stock called Brilund. At the time,
Darvas knew basically nothing about stocks. He was offered 6000 shares, which were
valued at 50 cents a share at the time, as compensation for his services. He actually
ended up not being able to make the performance, but out of courtesy he offered to buy
the stock anyway.
After the purchase, he thought nothing of the stock until he checked the price for the
first time two months later. Much to his amazement the stock had appreciated in value to
$1.90 per share. He could hardly believe what he saw, and he immediately sold the
stock and netted a profit of nearly $8000. He was so amazed at the profit potential of
this transaction that he became totally hooked on the stock market.
From this first profitable experience, Darvas became fascinated with and took a
strong interest in learning more about stocks. As with most people who decide to give
stock trading a try, Darvas followed the typical pattern, looking for the secret to the
market. Because he had no experience in the stock market, he really didnt know where
to start and what to do. So he started asking people he knew and came into contact with
during his daily affairs to see if they knew of any good stocks and if they had any good
tips. As he soon found out, most people he talked to seemed to know quite a bit about
stocks and were more than willing to give him their advice about what stocks to buy.
Many people would give him names of stocks that would certainly make him a rich man
in a short period of time. He kept these first buys and tips confined to Canadian penny
stocksafter all, that was where he realized this first great profitso there had to be
more to come from these great little gems.
This haphazard system, like so many usually discover, produced dismal results and
soon he was averaging approximately $100 a week in losses. It seemed like all the
eager advice that came his way did not amount to much success. He would trade by
moving in and out of stocks very quickly, usually trading more as he would receive
additional tips. He would sometimes hold 25 to 30 different stocks at one time, and the
ones that did well for him he liked so much he would call them his pets. He even
started trading to the old saying you can never go broke by taking a profit, and this
caused him to take very small profits when he had them, which led to overtrading. After
nearly a year had passed, he started becoming disgruntled that the next Brilund had not
come along, so he decided to change strategies.
Darvas then began to subscribe to stock market newsletters and investment
subscription services. After all, the writers of these newsletters and services had to be
the experts, as they followed the market constantly. This made much more sense to him
than listening to the average person on the street. He began blindly buying the
recommendations that were featured in the newsletters. Once again, the results he
desired were not to be had, and not only was he losing more money in the market, but it
was also costly to continue the subscription services.
Next, Darvas decided he would go right to the best sources, the brokers. After all,
they were not only in the market every day, they actually earned their living by advising
people on what stocks to buy. With a broker, Darvas was now going to trade in stocks
listed on the New York Stock Exchange, and he thought he now had discovered the
secret of the market. After all, now he was a real player in the big market. He was
trading about once a day and thought he had become a true stock operator. To better
understand the language of his broker and the street, he began to read all the books he
could on the stock market and investments. Darvas mentions in a feature article in Time
magazine that he read over 200 books on the stock market and great speculators.
After the knowledge gained from reading all about the market and finance, he
decided to concentrate more on the fundamentals of stocks because the advice he was
getting from his broker was not producing very positive results. This focus on the
fundamentals required a great deal of attention to detail and careful analysis. He studied
this extensively. Along the way he studied annual reports, insider trading, and began to
do other types of research. He started to base his trades on certain popular Wall Street
favored statistics such as P/E ratios, stock ratings, etc. These trades also did not
produce very positive results, but it was here that he started to discover that industry
groups were important, and that there was a certain follow-the-leader style to the
market. He would then decide to select the most active and strongest group and choose
the leader, based strictly on fundamentals, of that group.
From this analysis he discovered a stock called Jones & Laughlin Steel, of which
the steel group had been a market leader at the time. He bought 1000 shares on margin
(which at the time was 70 percent) at the price of $52.50 per share. He put $36,750 into
this stock, which was all the money he had. He could not believe his eyes as the price
started to fall, despite all the study he did on the fundamentals and how he carefully
selected this leading stock. He simply would not accept the fact that the price was
declining, and he kept thinking that this stock did not support a fall in its price. As the
price fell further, he finally sold at $44 per share. He had lost approximately $9000.
While the Jones & Laughlin Steel experience was a devastating blow to his
newfound strategy, he noticed while searching through the paper a stock called Texas
Gulf Producing. This stock kept rising in price even though he had not heard of this
company. He didnt quite know why the price kept rising; all he knew was that it was
rising. He could not believe the rise in this stock, as he was certain that he would have
come across this company when he was doing his research of superior fundamental
stocks. After following the stock and its price behavior, he decided to buy 1000 shares
at $37.25 per share and subsequently sold five weeks later at $43.25 a share for a
$5000 profit after commissions.
Nearly three years had passed since the profitable Brilund transaction, and after
trying the many trading methods we mentioned previously, Darvas learned from this
trade that the reason why the stock was going up in price was because of the action of
the stock within the market itself, and that is what he decided was what really mattered.
He then decided to act on the actions of the market itself and began to carefully
study the price action among stocks. He decided to begin studying past stock guides and
charts looking for patterns and price action and actual performance. He vigorously
studied these chart guides, which represented past stock patterns. This dedication to
study would prove to pay great rewards for him in future years. He went on to combine
both fundamental and technical analysis, which he called his Techno-Fundamentalist
approach, and this became the building block of his Box Theory (both described later
in this chapter).
Darvas came to realize through this detailed study that there were no good or bad
stocks. There were only stocks that rose in price and stocks that declined in price, and
that price is based on the laws of supply and demand in the marketplace. This
discovery finally taught him to trade less as he became more patient in waiting for
opportunities to present themselves.
Once when he had to leave town for a month for his dancing arrangements he told
his broker to handle $10,000 for him. Upon his return, Darvas discovered that his
broker traded as many as 40 times during the month that he was gone. He ended up
netting a profit of only $300 for the whole month. But what Darvas discovered was that
his broker would sell many stocks that were rising in order to realize a small profit,
and he kept the ones that continued to fall in hopes of recovering his capital. This
observation led Darvas to believe that you should never sell a rising stock but always
quickly sell a losing stock. He also discovered that buying higher-priced stocks was
more profitable, and there was more action in those stocks. He learned from this
experience and decided not to listen to the brokerage community. Darvas concluded that
business is one thing and the performance of the stock of that company is another thing.
As he kept learning he realized many losses in his trades. He regarded these losses
and his setbacks as his tuition on Wall Street, but he was determined to succeed. He
viewed this experience as if he were trying to gain his masters degree on Wall Street.
Eventually he discovered that his losses occurred due to his abandoning his rules,
overconfidence when he was successful, and dispair when he was unsuccessful.
After all his study, Darvas was finally feeling like he was learning more and more
and was close to putting a strategy together that would produce the results he desired.
He summed up some of his discoveries and experiences. He fell for all the common
temptations that nearly everyone who ventures into stocks fall for, such as:

Low-priced stocks
Tips and rumors
Quality stocks that had fallen hard during a temporary drop in the overall market

He also found it was foolish to buy based solely on price alone, especially the high-
priced stocks. Also, the former leaders can take a long time to come back after a
correction, and most might never come back to their former levels. He discovered
timing was the important thing, and it had to do with the overall behavior of the stock in
the general market. It is the anticipation of growth rather than the growth itself that leads
to great profits in growth stocks, he concluded. He thought it was more profitable to buy
when the price was going up, and he was not interested unless it was increasing. This
became his main reason for trading in stocks. He thought the market behaves the way it
does due to the participants behaving the way they do, and no one knows what they will
do until they actually do it.
He then summed up the long road he had taken to this point. It was actually no
different than the experiences of most traders: the difference with Darvas was that he
refused to give up and he stayed focused and determined to succeed. His trading system
followed this typical path:

1. Tips and rumors.


2. Subscriptions to market newsletters.
3. Broker advice.
4. Stock market books (this is actually valuable, as it taught him the vocabulary of
Wall Street).
5. Annual reports and fundamentals.
6. OTC stocks (small stocks with limited following).
7. Insider trading.
8. Research (industry groups, P/E ratios, stock ratings, etc.). This one caused him a
$9000 loss on Jones & Laughlin.
9. Technical (price action). This is the one that proved most successful.

As he continued to develop his strategies and rules, his efforts finally began to pay
off. Darvas actively traded from 1952 to the early 1960s. He made $2,450,000 from his
start in the markets with the Brilund profit. He made the bulk of it in 18 monthsa total
of $2,250,000after he made all the mistakes and then refined his strategy. He was so
successful and talked about that the American Stock Exchange actually suspended the
use of the stop-loss order (explained in detail later in this chapter) that he employed.
Once the strategies that Darvas implemented to gain his riches became public, many
people started to follow his methods and utilized the stop-loss orders. There were so
many stop-loss orders being placed that when they were all triggered, it caused a chain
reaction of sell orders. This activity caused erratic and rapid declines in stock prices
on the small American Stock Exchange and induced the exchange to suspend their use.
In May 1959, six-and a-half years after his start in the stock market and well over
$2 million later in profits, he was featured in the business pages of Time magazine. This
article caused quite a stir among Wall Streeters, as it detailed how Darvas disregarded
many of the common investment practices on the street such as focusing strictly on low
P/E ratio stocks, taking advice from brokers, etc. It also caused quite a bit of interest
and excitement in the market, due to the success he attained, and even led to offers from
publishers for Darvas to tell his entire story.
Darvas went on to write his own story in the popular book How I Made $2,000,000
in the Stock Market. The book sold more than 200,000 copies in just eight weeks. He
then wrote a subsequent book Wall Street: The Other Las Vegas. The strategies he
implemented to gain his riches follow.

The Darvas Method

Nicolas Darvas, through many years of trial and error, would discover, just like those
before him, that there were certain skills, disciplines, and trading strategies that would
emerge from his experience and begin to produce the positive results he was seeking.
Careful Skills Learned over Time

Probably the number-one trait that we could apply to Darvas was perseverance. After
all, he had another profession that he was very successful with. He was not even in the
securities business, but his first taste of success led him on a relentless journey that
took years of hard work and study and included many frustrations. Most people would
have given up long before Darvas would even attempt to continue on with the next step
in the learning process. Determination and constant self-evaluation of mistakes are key
traits of the very best traders. Darvas mentions in the Time article that he would spend
nearly eight hours a day studying the market and price movements of certain stocks.
This was in addition to the grueling schedule of his dance profession.
Darvas believed investors lose on their trades because of ignorance and believing
in magical solutions to their problems instead of rational ones. He thought they relied
too much on feeling and so-called intuition when they should be thinking instead. This
led him to believe that other keys for success critical to great results were:

Objectives
Psychology
The conditions in which you operate

He set his goals high, as he believed that the best speculators searched for only the
very best opportunities. This correlates to what Gerald Loeb also believed, which was
that the very best speculators wanted to make a killing in the market. This drive for the
highest level possible is another trait of successful people in other fields as well.
Darvas also did not believe in paper trading, as that did not entail the emotional
side of trading, which was one of the most difficult parts to master. He believed one
simply needed to have real money on the table to test ones mental abilities. Successful
traders need to understand what they are buying and what it is they hope to sell later. He
viewed speculation as the basis of the buyers estimates of how much money they might
subsequently be able to sell the stock for at a future time.
Though he used charts to see and study trends, Darvas considered himself to be
more of a mental chartist. He was definitely not a tape reader like Livermore or Loeb,
as his professional dance engagements actually removed him far from Wall Street and
the tape. He was actually more of a price movement analyst, and many times he would
study the movements in the past, such as the past week, due to the retrieval of late
information because of his travel schedule.
His other key secrets were self-discipline and patience. He knew to be truly
successful one had to wait for the right opportunities to present themselves, and this
could sometimes mean doing nothing for long periods of time. This inactivity is
especially difficult for active stock traders, but the very best ones know how to control
this and avoid the impulse trades and the overtrading that can be very costly to their
portfolio.

The Box Theory Pays Millions

Patience paid off in the long run because Darvas knew he needed to know how to spot
the rising stocks and the trends of these rising stocks. After a long, extensive study, he
made a connection between what a stock might do based on what it was actually doing
at the current time. He found a consistency of action and discovered the movement of
stocks in trends. In both directions there were pauses or minor corrections and certain
resistance levels. He viewed these changes in price like a rubber ball bouncing inside a
glass box. There was a certain orderly movement and progression, but it was different
for each stock.
This became the basis of his Box Theory. The progression from one box to another
between clearly defined limits and then a breakthrough to a new level, which would
establish another box, was positive price action in motion. This was a learned skill that
he put together after many long days and nights of intense study and looking for
formations and patterns. This observation skill only comes from trial and error and
constant study and testing of what you actually see and what actually works in practice.
Darvas, like Loeb, also discovered that certain stocks would move with the same
characteristics that could distinguish people. For example, some stocks were very
volatile and some were more quiet and reserved in their performance. After years of
observation and following the market as closely as these great traders did, one could
get to know the movements of certain stocks and relate them to certain personality
traits.
Darvas also viewed long-term investors as the real gamblers in the market due to
their eternal hope of the lucky card. They would hold on to losing stocks and
continuously hope for them to come back in price. As all great traders know, this is a
tragic mistake and one that can cost you your entire capital, not to mention the loss of
confidence that is crucial to a successful stock operator. As Darvas discovered, most of
his stocks, after his rules forced him out of them, would continue to fall in price. His
system preserved his capital for the next opportunity. This also protected and kept intact
his confidence and actually boosted it. This confidence in his system would help him to
gain control of his emotional side.

Control and Minimize Risk

Darvas learned over the years that to be a successful stock trader one had to be
disciplined in his or her approach. His main consideration was to lose as little as
possible when he was wrong. This strengthened his dedication to his loss-cutting
strategy, which again is probably the most crucial discipline and trading rule of the five
traders featured in this book. It is such an important point that it has and will be
repeated many times throughout this book. Darvas wanted to control and minimize his
risk. The only way to accomplish this was to discipline himself to minimize his losses
on the trades that moved against him.
He would also ignore tax considerations in his sell decisions and concentrate first
on making a profit in the stock. He would then let the action of the stock determine
when to sell it, as opposed to ignoring the price movements of the stock and focusing on
reducing taxes and the consequences of a tax law.
The Darvas Method was based on buying stocks and not on shorting stocks. Here he
agreed with Loebs thinking that it seemed harder to be as profitable on the short side of
the market as opposed to the long side. Darvas found that trading in only rising or bull
markets was the best chance for profits, as he also thought that because the general
trend of the market over time was an upward trend, he would stay with the longer-term
odds to try to reduce his risk.
As he developed the Darvas Method, which consisted of his Techno-Fundamentalist
approach and the Box Theory, he also knew and realized he would:

Be right only about half the time


Needed a system to reduce his risks
Have to put his pride and ego in check
Become impartial to any stock or specific theory

He also knew that he had to change the way he thought about stocks. He had to
adopt a cold, unemotional attitude toward all stocks, even the ones that provided the
best performance for him. He knew he had to bring his emotions under complete
control. This required an incredible amount of self-discipline in order to combat the
emotions of fear, greed, hope, and ignorance that play such a large role in the market
and on the individual on a daily basis.
To train his emotions, he would write down the reasons why he bought and sold
each stock. If he suffered a loss on a trade, he would write down what he thought the
reason was that contributed to the loss. By writing these reasons down and studying
them, he would be better equipped in the future to avoid the same mistakes. He would
call this his cause-of-errors table. It was a very valuable tool for him, and as we have
seen from those before him and those to come, the trait of owning up to your losses
using a handwritten process of review and analysis is a key trait of all these great
traders. You simply must be able to face the times when you were not correct, be able
to look at those losing transactions objectively, and learn from them to avoid making the
same mistakes in the future. If you can repeatedly do this over and over for many years,
you should learn in increments what past errors were made. By avoiding them in the
future, successful traders can save quite a bit of money by not engaging in those types of
transactions or cutting losses even shorter and shorter over time.
Darvas learned early on that one of the quickest ways to lose money in the market
was to listen to others and all of their so-called expert opinions. He always played a
lone hand after he learned that lesson and only took action based on his own study and
observation. For his source of information he only relied on Barrons, which would
come out weekly and list the actual price movements that occurred in the market. When
he was traveling the world with his dance partner, he did not have the convenience of
watching the tape all day. He had to rely on cablegrams being faxed to the various
hotels he would stay at during his travels. These cables would quote him the prices of
the stocks he was interested in. Once, when he signed a two-year dance contract around
the world, the only source of information he had was his cablegrams and a week-old
edition of Barrons. He would study the stock price movements in Barrons and use this
source as his only base to make his trading decisions. The discipline to use only a
source of facts and not open your ears to others opinions was a key to his observations
that led him to his best profits.
As he got better in his trading, he would hold only 5 to 8 stocks at one time. This
was in stark contrast to his earlier days, when he was overtrading and would hold up to
30 stocks at a time. This concentration and not diversification allowed him to keep his
focus on a limited number of stocks to really understand them and their price movement
performance.
Darvas also discovered that there was a relationship confined within certain
principles, but he thought it could not be measured exactly. What he meant by this was
that he used this relationship to help him determine the general trend of the market. He
discovered that it was crucial to know if the market was either in a strong bull or bear
market environment. He believed and realized that most and almost all stocks would
follow or be influenced by the general trend of the market. Again, the discipline to be
able to trade only in the right market environment attributed to many of his successful
trades.
Once the system started to work, his rules would almost automatically dictate what
actions he was to take, such as buying more of an advancing issue, cutting short a loss,
or staying out of the market. He discovered that his system would discipline him to
ignore the emotional side of trading, and if he could constantly stick to the rules of his
system, he would succeed.
Once when he had made his first half-a-million dollars in profit, he started to
become overconfident and made some huge mistakes. One mistake he made was he
moved closer to Wall Street (one-half mile from the Exchange) to be closer to the
action. This actually caused him large losses as he lost his focus, became distracted,
and began to ignore his rules. He got away from being the lone wolf and would become
distracted to the point of listening to others opinions. He lost approximately $100,000
in a few weeks as he began to overtrade and trade in desperation. His emotions were
then completely out of control. Fortunately, he noticed this and decided to go back to
Paris (where he would spend a lot of time performing) and back to his cable system to
get back on track. After seeing his errors, he returned with his system back in place and
to the disciplines that had helped him reach his first milestone.
He also knew that no one could completely master the stock market. In 1961, after
his successes of millions and his bestselling book, Darvas was still learning and
tweaking his system. It proves that you always need to be a student of the market. For
example, from May 1961 to January 1962, he kept taking small losses and finally quit
trading during that time, as the market offered no new buys. As expected, the market
slumped starting in May 1962, and Darvas was completely out of the market in order to
avoid the losses that would have eventually cost him, had he ignored the general trend
of the market and all the key signals his system had informed him about.

Mistakes and New Rules

Darvas created his trading rules as he kept learning from his mistakes and from his
observations of what was working and what was not working in the market. It was
through this process that he created The Darvas Method.
The Darvas Method consisted of what he called his Techno-Fundamentalist
approach and his Box Theory. This is how he created his theories. He would not
concentrate on the fallen leaders due to the heavy overhead resistance that would exist
from previous buyers of the stock who had not cut short their losses. As described also
by Loeb, these previous buyers would hope and wait for the fallen stock to get back to
their original buy point so they could sell and get out of the transaction at a break-even
point. Darvas knew this overhead resistance would hold back former leaders and keep
them from making new highs. Instead, he focused on the new leaders that would be
emerging with a new market cycle. He liked when these stocks would hit all-time high
prices. These stocks would not have the overhead resistance to deal with, relieving the
stock of a certain price level in order for it to gain new ground.
He noticed through his studies of stock price movements that stocks would trade
within certain ranges. He discovered that the combination of price and increased
volume was a powerful source of demand to move a stock forward. He also was not
too concerned about the underlying reasons why certain stocks would just increase in
price. He decided that the main reasons would actually come out after the action in the
stock had occurred. As he continued his study of hundreds of charts and stock guides, he
discovered that stocks did behave in certain trends and had common characteristics.
They seemed to follow certain patterns over time. He noticed certain defined upward
and downward trends in their chart patterns. It was within these patterns that the detail
of the movement was the key. This is difficult to see, and it takes study and attention to
detail to grasp. He saw within the trends that stocks would move in a series of frames
that he would call boxes. The stocks would oscillate between high and low points
within the framework of each box.
With the Box Theory, if a stock he was watching would create boxes that stood like
a pyramid on top of each other, and would be in the highest current box, he would
continue to watch the stock. The stock should bounce around within the box between the
high and low, for example between $35 and $40. This would create what he would call
a 35/40 box.
He would correlate this price action like the actions of a dancer. For example, a
dancer would set himself in a crouch position and bounce up and down in a small
manner before he would be ready to leap into the air. He viewed stocks as acting in a
similar manner as they bounced around within the box frames. As long they did not
violate the lower end of the box, he considered the action positive. If the stock would
fall below $35 (example above), he would eliminate it from his watch list. This meant
that the stock was probably not as strong as he thought it should be, and he was only
interested in the stocks that were going to be the strong price leaders.
The key to this theory was to watch the stock move within the box. If it exceeded the
top end of the box at $40 (example above), especially on an increase in volume, he
would buy it. This would prove to him that the stock was now ready to move to the next
level of boxes and had sufficient demand for an advance in price. He did not have a
specific fixed rule on how this action was to take place. He would mostly do this
through observation and then react quickly when it did happen.
This happens when you become familiar with the market action and the stocks you
are watching day to day and then the constant observation skill you give to the task.
Again, this was not easy, but the rewards paid off for him. The range of the boxes
would vary between the different stocks he was watching. His challenge was to define
the boxes for each stock to make sure the movement would confine a proper box for
each different stock. Again, attention to detail and study were key to putting this strategy
together. After trial and error with this new method, he would get better at establishing
the different boxes and ranges for the stocks he was watching. In order to make sure he
would catch the proper buy point of the stock at the proper time, he would place
automatic on stop buy orders with his broker.
As the stocks would create new boxes, he would try to time his buys by buying at
the closest fraction above the penetration point, or the highest point of the highest box
that he would establish. He would set the purchase price as close as possible to this
point as it drove through the top of the box or ceiling and into high ground. He also
realized that this method was no sure-proof secret to the market, and he estimated that
he would be right only about half of the time. Through many different stocks, he would
buy and sell based on these new theories. He kept refining the approach as he went
along and learned new ideas. In order to protect himself from the estimated 50 percent
of the times he thought he would be wrong, he established his stop-loss order method
for protecting his profits. The stop-loss order would instruct his broker to sell his
positions when the stock declined to a set price that Darvas would give for each stock
he was holding.
The keys to this Box Theory were looking for high volume increases as the stock
moved higher, especially in the smaller issues. He would use the box to establish the
price for the buy if and only if it broke through the top of the box on an increase in
volume. Once this happened, he knew he had to keep hold of a rising stock and not to
sell too early, and to limit his losses when he was wrong.
The Box Theory was based on the following presumptions, and he was now ready
to set his new objectives.

He would buy only the right stocks (rising stocks).


He needed to have his timing correct (stocks hitting new highs).
He had to contain his mistakes to small and limiting losses.
He would let his big profits (his big winners) run until they proved otherwise.

The tools he would utilize to accomplish these new objectives were:

Focus exclusively on price and volume action


His Box Theory
Use of automatic on-stop buy orders
Limit his losses and control risk using stop-loss sell orders

With his new system, he decided he would just follow a strong stocks path upward,
raising his stop-loss order behind him as the price of the stock kept increasing. If the
trend continued upward, he would buy more stock, or pyramid up, and if it reversed he
would sell out and minimize his loss.
This strategy caused him to lean more toward the technical side of the market and
simple observation, but he also believed that the best fundamental stocks performed
even better because the analysts would study them and advise mutual fund managers to
purchase them. The activity of mutual fund managers buying these recommended stocks
would add buying power to the stock and hopefully contribute to the increase in its
price. This would increase the chance of these stocks becoming the new leaders. These
would also be the ones with the best-expected earnings for the future. He considered
this an important part of a stocks price movement. This allowed him to take a longer
view than just the technical side, and he combined the two for a complete analysis of
stocks.
He now would look at the following concerning fundamentals:

The capitalization of the company


The industry group that the stock belonged to
The expected earnings of the company for upcoming quarters

He would use the following when evaluating technical action:

The Box Theory


The volume of the stock as it traded
The historical peak price of the stock

This is what he now called his Techno-Fundamentalist approach. This approach,


combined with his Box Theory, was the formation of the strategy that would lead to his
success in the market.
Along the way Darvas found that the minor fluctuations in the market were a
distraction and involved too much guesswork. He discovered that when he was away
and not looking for each minor change in the market that he did much better. This was a
different approach from Livermore and Loeb, who were constant tape readers. Because
of his approach, Darvas would utilize stop-loss orders as his risk control mechanism
for cutting his losses short. So it did not matter that his approach to the day-to-day
monitoring of the market was different than Livermore and Loebs tape-reading
approach; they all recognized the important need for a strict loss-cutting rule.
In August 1957, nearly five years after his experience with Brilund, market action
forced Darvas out of every single stock he owned. He found there was nothing
attractive to buy. Sure enough, a baby bear market then hit stocks. He found that it was
hard to determine when a turning point appeared, but it was easy to see after the fact.
He relied totally on his stocks that were following his rules to determine when those
turning points were occurring.
During this baby bear market in 1957, he began studying further and stayed out of
the market. He discovered that the former leaders would not likely be the leaders of the
next up market. He studied the stocks that would decline the least during this correction.
He thought that they would have the best opportunity to be the new leaders. Most of
these stocks also possessed the best fundamental characteristics as well. This was a
strong reason why he developed his techno-fundamentalist approach. His theory was
that earnings and the future estimate of increased earnings were the keys from a
fundamental approach, and would be the key drivers of higher stock prices. He would
then try to look out 20 years for future industries and demand for products and try to
target those companies that would try to meet that demand. Though this outlook was
very difficult because of the time frame involved, he would try to see what demands in
the future could have the most impact on certain stocks and industries.
In the fall of 1957, the system that Darvas had painstakingly been putting together
started to work with a stock called Lorillard. He purchased this stock after watching it
rise from $17 to $27 on increased volume. He stayed patient with this stock, and he set
up a box of 24/27 and started to buy as it kept rising through the tops of his established
boxes. The 24/27 box meant that he thought the stock would trade between the range of
$24 to $27, based on its recent action. If the stock dropped below $24, he would sell
out his shares and move on to another opportunity. If it broke out above $27, he thought
he had a real leader and its prospects for further advances would be high, especially if
the increased prices came on larger than normal volume. He kept buying Lorillard as
the stock increased in price, and he took advantage of margin to leverage his trade.
Darvas would also use what he called pilot buys to test the direction of a stock. This
was the same strategy as Livermores probing strategy that he was using to test his
stocks many decades earlier. Darvas would also use his Box Theory to implement his
pyramiding strategy to continue buying a strong rising stock as it kept advancing in
price.
In five months, Lorillard and Diners Club, another stock he was purchasing using
his method, produced profits of $21,000, and he doubled his capital. He used margin on
both stocks to leverage his gains.
He then made a mistake by buying Lorillard back at three different times due to his
prior success with the stock. He ended up taking three small losses and learned the
lesson of not having to think that just because a stock provided large profits before, that
he could and should be able to do it again with the same stock. You must keep looking
for the next stock with the right characteristics instead of the same old familiar names
that might have worked very profitably for you in the past.
His confidence in his system began to grow, and he then started watching a stock
called E.L. Bruce. He started buying this stock in May 1958, and he bought the stock
five different times, in lots of 500 shares each, all at higher prices as the stock kept
advancing. He had a stop loss order put in at $48 per share. His purchases looked like
this:
E.L. Bruce continued to rise dramatically, and by June 13th it was trading at $77
per share. Darvas now had a fast-rising star, and his patience and experience told him
to hang on to a winner until it proved otherwise. Darvas was then told that the
American Stock Exchange had suspended trading in E.L. Bruce due to a group who was
trying to take control of the company and buy out the stock. This action was the initial
cause for the stock to increase in price, but Darvas knew nothing about this at the time
that his rules alerted him to the action of the stock, which is why he began purchasing it.
Because there were also many short sellers in the stock, as they viewed it as
overvalued while the stock kept rising, they could not cover their short positions.
This action caused a disorderly market in the stock, which is why the exchange
suspended trading. Because the short sellers still had to cover their positions, they were
willing to pay $100 per share in the over-the-counter market. As Darvas held fast to his
stock due to the rising demand, he held on for two more weeks and then finally sold out
at increments of 100 or 200 shares at an average price of $171 per share. His profit on
the transactions amounted to more than $295,300.
At this time Darvas had made approximately $325,000 in nine months with his
success in Lorillard and E.L. Bruce. He became more cautious, withdrawing one-
quarter of his capital and put it away for safekeeping. This money management skill of
taking profits and putting it away for reserve would serve him well as he continued to
build his capital base.
With the first real successes tested with his new system, he would continue with his
methods with two additional stocks, which were Universal Controls and Thiokol. After
observation and buying at the right times with his Box Theory, he was sitting on over a
half-million dollars in paper profits when he started to become overconfident.
As mentioned earlier, Darvas had moved close to Wall Street, lost his focus,
became distracted, abandoned his rules, and found himself facing nearly $100,000 in
losses on other bad trades. After acknowledging his mistakes and going to Paris to
recollect himself, he returned to the United States to continue his trading. He devoted
himself to his rules, which he felt confident in and had shown him what he was capable
of if he kept his discipline and stuck to his hard-earned strategy.
He kept trading in promising stocks and cutting losses on losing stocks, and he still
held strong positions in Universal Controls and Thiokol. They kept rising and he kept
holding, as there were no good reasons to sell strong upward-trending stocks. All these
trades were done through telegram and not speaking to his brokers. He wanted
absolutely no other opinions to play into his trading strategy. After Universal rocketed
from $66 to $102 in three weeks, he noticed that the rapid rise would not last and as the
stock began to turn directions, Darvas noticed the weakening of the stock and sold out
his positions between $86.25 and $89.75. Though this was off the high, Darvas always
said no one could buy at the absolute lowest price and sell at the absolute highest price.
His profit nonetheless was more than $409,350.
His next big winner was Texas Instruments, which he started buying at $94.362 and
made another add-on purchase at $97.875. He then made an additional purchase at
$101.875 as the stock kept rising in price. Imagine how scary these transactions must
have seemed to most investors, as Darvas would make these initial buys at the highest
price and then add to them at higher and higher prices.
Meanwhile his stake in Thiokol was continuing to act very well. After a three-for-
one split in the stock, Darvas was finally stopped out of Thiokol, but it would turn out
to be his most profitable trade. His profit on Thiokol was more than $862,000.
In the spring of 1959, with more than a million dollars in stock market profits, he
made new pilot buys into four strong fundamental and technical stocks he had been
watching for quite a while. Beckman Industries and Litton Industries did not work out,
and he was stopped out with small losses. He then put more money into the other two,
which had acted as he expected, Zenith Radio and Fairchild Camera.
He kept his system in place until he was finally stopped out of these three strong
remaining stocks. When he finally sold Texas Instruments, Zenith Radio, and Fairchild
Camera, his total profits during the seven years since he started with the Brilund
transaction was more than $2,000,000.
The Darvas Box Theory kept him out of declining or bear markets. Because the lack
of advancing stocks would not create the boxes he was looking for, he would not
purchase anything. This was a key trading rule and discipline of his, which helped
provide the ability to stay on the sidelines when the market offered no new good buying
opportunities.
Darvas would also have a very high percentage of his capital in a single issue of
stock, sometimes as much as 50 percent, if he knew he was right. For example, he had
50 percent of his capital in Texas Instruments when he made his final purchase in this
stock. This is also a strategy he was more comfortable with as he grew more successful
and developed more experience over time.

Applying the Box Theory to Current Times

As we showed with Livermore, we will use Darvass trading rules and apply them to a
leader in the current market environment. Omnivision Technologies (OVTI) is a leader
in the Semiconductor-Electronics group that designs, develops, and markets
semiconductor imaging devices for computing, communications, and electronics
applications. Fundamentals of the company have been outstanding recently. The January
31, 2003 fiscal quarter showed a 999-percent increase in earnings and a 206-percent
increase in revenues. The fiscal quarter ended April 2003 showed a 243-percent
increase in earnings and a 204-percent increase in revenues. As mentioned before, the
NASDAQ market was leading the new uptrend that started in mid-March 2003, and
Omnivision was soon to follow shortly thereafter. Figure 4-1 shows the daily activity
of Omnivision from April 2003 through September 2003. The stock more than doubled
during this brief six-month period.
Figure 4-1 Omnivision Technologies. April 2003 through September 2003. Source:
www.bigcharts.com.
Notice the stair-step pattern of the boxes as the stock kept climbing upward. The
boxes also take into account the minor daily fluctuations that all stocks go through.
However, in the best winning stocks, these types of patterns usually do not violate the
trading rules formulated. If they do, the stop-loss order is there to protect the gains and
minimize the downside risk.
Nicolas Darvas is an interesting example of someone who refused to quit and give
in. His determination and perseverance to succeed was a major reason for the success
that finally came his way after many years of study and developing his theories and
methods.
5
William J. ONeil

with persistence and hard work, anything is possible. You can do it, and
your own determination to succeed is the most important element.

The Chairman of Research

William J. ONeil was born in 1933 in Oklahoma City and raised in Texas. He joined
the Air Force, worked his way through college, and graduated from Southern Methodist
University. All the while, he was interested in the stock market. He began his career as
a stockbroker with Hayden, Stone & Co. in 1958 after graduation from college.
It was during his early days at Hayden, Stone & Co. that ONeil decided he liked
the research side of the business as opposed to the sales side, which is where he had
been spending most of his time. ONeils trading career started off like many others: by
subscribing to a few investment newsletters and buying low P/E ratio stocks. His
results did not show much success, and he continued reading many books on the stock
market. In 1959, one year after he became a stockbroker, he noticed that the Dreyfus
Fund had performed much better than all the other funds. Relatively small at $15
million, the fund was managed by Jack Dreyfus. The results of the Dreyfus Fund were
twice as strong as all the other funds at that time.
ONeil was so intrigued by the success of this fund that he decided to study every
stock the fund purchased over the prior two-year period. He sent away for the fund
prospectus and quarterly reports that would identify which stocks the fund had
purchased, and he then studied the chart patterns of these stocks. The discovery he made
changed his view on how to buy stocks and became the building block that led to the
development of his strategy.
Through his extensive study, ONeil discovered that of the approximately 100
stocks the fund had purchased from 1957 to 1959, all were purchased when the stocks
actually reached new highs in price after correcting and setting up in a base-building
pattern. A chartist and a tape reader, Jack Dreyfus was buying every stock for his fund
at a new high in price after the stocks were coming out of sound basing patterns.
This discovery led ONeil to develop his own set of rules based on researching
common characteristics of the leading stocks in terms of price performance. It took him
about two or three years to put his system together. At about the same time (in 1960), he
was accepted to Harvard Business Schools first Program for Management
Development (PMD). While at Harvard, one of the books he read was How to Trade in
Stocks by Jesse Livermore. He learned from that book that his objective in the market
should be to lose the least amount of money when he was wrong and to be sure to make
the big money when he was right.
Using his own rules, formulated through his trading experiences and testing, ONeil
went on to increase his personal portfolio more than twentyfold in 18 months from late
1962 to 1964.
ONeil made his first trade in the market with only $500, which is all he had at the
time. It proves once again, as many of the traders featured in this book have
demonstrated, that its possible to start with a limited capital stake, and, through proper
discipline and adherence to rules, grow it into a substantial amount over time.
The new rules he was developing became known as the CAN SLIM method, and it
is discussed later in this chapter. The first stock he purchased using this method was
Universal Match in February 1960. It doubled in price in 16 weeks. However, he sold
the stock too quickly and didnt make much on the trade, largely because he did not
have much money to invest at the time. He next bought Procter & Gamble, Reynolds
Tobacco, and MGM following the same rules. Again, these all did well, but due to his
limited capital, his gains were minimal.
From Jesse Livermores How to Trade in Stocks, ONeil began adopting the
strategy of pyramiding up, or buying more of a stock as it continued to rise in price.
Because ONeils new rules seemed to be getting him into the right stocks at the right
time, the pyramiding strategy would only leverage his gains. As a result, his trading
profits began to improve.
During the first half of 1961, ONeil did well in his trades with Great Western
Financial, Brunswick, Kerr-McGee, Crown Cork & Seal, AMF, and Certain-teed. But
by the summer of 1961, the market started to turn down, and all of his gains evaporated.
He had discovered that although he had bought correctly, he held on too long as the
market shifted directions. He then spent the remainder of 1961 analyzing every
transaction he had made that year. This analysis is finally what put him on the right path.
You might remember that we saw this kind of self-analysis as a key trait in all the other
successful traders before him.
During his analysis, ONeil noticed that when he correctly bought Certain-teed in
the low 20s after a pullback from its initial base, he sold and was quickly shaken out
with only a 2- or 3-point profit. This quick action (similar to what we saw with Darvas
when he adopted the old strategy of you can never go broke by taking a profit)
actually would turn out to be a huge opportunity cost. In this example, Certain-teed later
went on to triple in price.
ONeil concluded that he would buy stocks as close to their pivot points as
possible and not pyramid up on the stock if it had increased 5 percent or more past this
point. He would buy more if the stock increased 2 percent or 3 percent above the
pivot point from his initial buy. This action indicated to him that he was probably right,
and the stock was going to continue to move up in price, but he wanted to control the
risk. He also decided he would sell when he had 20-percent to 25-percent gains in his
stocks but he would try to hold fast-rising stocks longer if their action did not warrant
sell signals. This patience concerning the time element (the best profits dont happen
overnight, and the road to success is a learning process) would pay off big for him in
his future years.
He discovered that successful growth stocks usually rise between 20 percent to 25
percent and then decline and begin to build new bases and then resume their advance.
He also noted when stocks took off quickly past their pivot point and gained 20 percent
within the first three weeks, these stocks tended to become the very best gainers and
must be held for at least eight weeks, then re-appraised and probably held much longer.
His new plan was to take profits at 20 percent when he had them, except for these most
powerful stocks that gain that same amount in the shortest period of time, and to cut his
losses quickly at 8 percent below his buy point. He also discovered the advantage of
pyramiding, providing he kept his add-on purchases within 3 percent of the original
purchase, as it would force him to move his money into his strongest stocks. The other
discovery he made, when all his early 1961 gains evaporated, was that the action of the
leading stocks topping (when they stopped advancing) would most likely signal that the
general market would begin declines of 10 percent or more. This is when he began to
study and concentrate on the action of the general market.
ONeils studies revealed how the markets movement as a whole affected
individual stocks. Three months later, his rules took him out of every stock he had,
strictly due to their individual action and on the action of the general market. He was
100 percent in cash when the market started to head for a big drop in the spring of 1962
(the same rules got him 100 percent in cash before the 1987 bad market break).
After reading Edwin Lefevres Reminiscences of a Stock Operator, ONeil saw the
parallel between the market of 1907 and the then current situation of 1962. He then
began to sell short Certain-teed, which was actually on the recommended buy list of
Hayden, Stone & Co. at the time. Shorting the stock subjected him to criticism from the
firm because he was still employed there. He also shorted Korvette in late 1962, and
the profits from these short transactions were substantial.
In October 1962, after the Cuban Missile Crisis subsided, the Dow increased and
began turning upward after it showed a classic follow-through confirmation. ONeil
bought Chrysler at $58 per share, as it was one of the first new leaders coming off the
market bottom. Throughout a strong market in 1963, he followed his rules and did
exceptionally well. Many of his accounts were up several hundred percent, and he
limited his losses to 5 percent and 6 percent. One of his best performers was Syntex,
which he had purchased at $100 per share in June 1963 (it was up 40 percent in eight
weeks). He held on and ran it out for six months.
While success might have come relatively quickly for ONeil, it wasnt always
easy. He spent many long nights studying in order to put his plan and strategy together. It
also took some in-depth analysis of his mistakes, the drive to correct those mistakes,
and the discipline not to repeat them.
His great success during the 1962 and 1963 periods were accomplished with three
exceptional trades back-to-back-to-back increasing his $5000 stake at the time to
$200,000, using some borrowed funds and margin to leverage his account. Those trades
were, short Korvette, long Chrysler, and long Syntex. This financial success allowed
ONeil to be one of the youngest ever (at age 30) to purchase a seat on The New York
Stock Exchange. It was at this point that he struck out on his own, leaving Hayden,
Stone. It was also during this time that he really started to do extensive stock research
and began creating the first U.S. stock daily database.

Cutting-Edge Research

In California, ONeil started his own company called William ONeil & Co., which
was to become a securities research firm servicing institutional investment firms. His
firm created the first and most comprehensive stock market database in the industry. It
is currently one of the most respected securities research firms in the country, serving
more than 600 major institutional accounts and tracking over 3000 technical and
fundamental data items on over 10,000 different publicly traded stocks. His company
also covers data on over 9600 mutual funds. One of the first products offered by
William ONeil & Company was the ONeil database datagraph books. Today, each
book displays 98 different fundamental and 27 different technical items for each stock.
These books still exist today but have mostly been replaced by WONDA (William
ONeil Direct Access). This service is a direct Web access link to the ONeil database.
WONDA was originally created for ONeils in-house money managers but is now
available for institutional clients. He also owns Daily Graphs, Inc., a company that
produces printed chart books and offers a Web-based chart service for individual
investors.
Through his extensive continuing study of what caused certain stocks to increase in
price more than others, ONeil discovered that the very best stocks shared certain
common characteristics before they began their impressive price moves. The study that
he performed went back to 1953, and he has put the findings into a resource that is
called The Model Book of Greatest Stock Market Winners, which features more than
600 of the greatest performing stocks over the past 50 years. He uses this historical
research as the basis for his investment strategy.
William J. ONeil is probably best known to the general public as the Founder and
Chairman of Investors Business Daily (IBD). IBD is an innovative fast growing
business newspaper publication, nearly every year increasing its reader base and taking
away market share from The Wall Street Journal. ONeil founded IBD in April 1984
with a base of only 15,000 subscribers, as he sought to develop a better way to provide
more useful investment information to the public. Today, the estimated daily readership
of IBD is more than 800,000. The national newspaper, which for many years did not
make a profit, was financed strictly on profits made from his own stock trades. It was
thought IBD would be for CEOs. It has turned out to be a much more useful product for
individual investors at all levels. Due to IBDs many proprietary ratings and tables, the
individual investor has an independent, reliable tool to access and research market
information in an unbiased view. It is based on factual research going back to his study
of successful stock models. New ideas for IBD are usually beta tested for up to one
year before they are introduced to the public in the paper. IBD is really a computer
printout and evaluation tool of the entire market. It also acts as a screening tool with
extensive research, analysis, and proprietary ratings.
Using the investment rules he formulated over the years and the research he
conducted that was instrumental in creating IBD, ONeil has attained some of the best
published returns in stock trading. He bought PicN Save in late 1976 and held it for
7 years for a twentyfold increase. He bought Price Company and realized a tenfold
increase in 3 years coming off the bottom of the 1982 bear market. Coming off the
bottom of the October 1998 market, he purchased America OnLine (AOL) and Charles
Schwab & Co. and made 456 percent and 313 percent, respectively, from the pivot buy
point to when he sold out his positions on the way up.
In 1990 and 1991, he bought Amgen on numerous days and spread out his buys.
Add-on purchases were made when there were significant gains on previous buys. If
the current price was 20 points over his average cost and a new pivot point occurred
off a proper base, he would buy more. This is a sophisticated pyramiding strategy that
should only be attempted by very experienced investors.
ONeils personal stock investment account averaged more than 40 percent annually
during the 1980s. He realized gains of 401 percent in 1998 and 322 percent in 1999.
His biggest winners during that period were AOL, Charles Schwab, Qualcomm, and
Sun Microsystems (charts shown at the end of this chapter). It was his second best
performance period ever, followed only by his initial success in the early 1960s.
He was also noted for placing a full-page advertisement in The Wall Street Journal
in early 1982, stating stocks had reached their lows, and that people should invest in
defense-electronics and certain consumer growth stocks. In that year, internal money
managers at his firm started purchasing stocks on full margin and had their best
performance ever up to that point. From 1978 to 1991, their account was up twentyfold.
Beginning in 1998 to 2000, their account was up 1500 percent.
The method ONeil devised for his trading rules is called the CAN SLIM
investment research tool. Each letter of the CAN SLIM acronym stands for a certain
characteristic that is common to all the greatest stocks going back to 1953. How well
has this method worked? David Ryan and Lee Freestone (independent individual
investors), among others who used CAN SLIM in the 1980s and 1990s, both have won
national investing championships with real money. There are also tens of thousands of
other confirmed success stories of dedicated IBD readers who have followed the CAN
SLIM method for a number of years and have realized and kept substantial profits,
especially during the great bull market years of the late 1990s.
ONeil published his first book in 1988 titled How to Make Money in Stocks. It
was the bestselling investment book of that year, and has since sold well over one
million copies. Its third edition published in 2002. In 2000, he published 24 Essentials
Lessons for Investment Success, which also became a top seller. In 2003, he published
his third book, The Successful Investor. I highly encourage you to read all of these
publications at least a few times, as they illustrate the correct strategies of the CAN
SLIM method in great detail. ONeil also provides Advanced Investment Workshops,
usually to sold-out audiences, a few times a year in select major cities that offer the
chance for the individual investor to see and hear his strategies in person.

The CAN SLIM Strategy

Vital Skills Are First Required

One trait that has been used to describe William ONeil in various interviews is his
relentless energy and hard work ethic. As the great traders before him all possessed,
we have seen that the amount of time devoted to the study of the details and the market
was a key trait and required skill of all. There is simply no substitute for hard work if
you want to succeed, especially if you want to be one of the best. In the stock market, as
weve mentioned before, it is no different. ONeil is a steadfast believer in the effort
that must be put forth to produce profitable results in the ever-challenging environment
of the stock market.
ONeil believes it takes time, study, diligence, and persistence to fully understand
and participate within the boundaries of the market for success. His early days included
many long nights of chart study before he felt he understood how the market actually
works. It was through the discoveries during these studies that he began to build his
rules on fact-based knowledge. His rules are also based on reducing risk to the lowest
possible point while trying to increase the returns to the greatest possibilities. This
high-level goal is something we saw in previous traders as well. Its the drive to
achieve at the highest level and having ambitious goals that ultimately lead to the
realization of those goals. Many investors have materially benefited from using his
CAN SLIM system.
ONeils system uses both fundamental and technical analysis in his trading rules.
His choice is to not be closed-minded to only one type of analysis, which is what many
investors do, but instead is based on looking at the facts of what and how the market
actually works. If the market, based on exhaustive study, proves that the greatest
performing stocks over the last 50 years showed common characteristics of both
fundamentals and technical price action, then why argue with how the market actually
works?
Remember what Jesse Livermore said in the twentieth century: The stock market
never really changes that much. What happened before will happen again and again and
again This saying has been proven again by ONeils detailed research of recurring
stock patterns. This is truly a skill all future great traders need to have: the ability to
look at objective facts and history instead of relying on someone elses personal
opinion or tips and touts.
ONeil also believes that its good to get kicked around in the market and lose some
money. He too viewed these losses as the required tuition you pay on Wall Street,
noting that traders can refine their skills once they learn from their mistakes. Losses
also test ones emotions and show how important it is to establish sound trading rules in
order to control the emotional side of stock investing.
He views the best investors as decisive individuals without huge egos. To be
successful in the market rarely has to do with intelligence. Humility and common sense
provide the necessary balance. ONeil mentions many times in his books that he
personally has known more than a few individuals who, despite their occupational
success and intelligence, suffered severe losses in the market. They either thought they
were smarter than the market, did not follow sound trading rules, or a combination of
the two. The stock market is simply a dangerous place for egos or dishonesty. To
succeed in the market you must leave your ego behind when the bell rings.
ONeil believes in keeping the process simple and basic. There are just too many
technical indicators out there that dont have as detailed a track record of success as
pure volume and price action based on good, fundamentally sound stocks. And to prove
this method works, each of the greats featured in this book looked at volume and price
action as the most important aspects for stock trading.
ONeil also believed in concentration and focus. Instead of trying to follow many
different indicators that are out there, he concentrates on only the time-proven ones that
produce the measure of demand in the market. These are the trends of the general
market and leading stocks and how they perform based on daily volume and price
action.
Luck plays no part in gaining long-term success trading stocks. It takes hard work,
persistence, and trial and error to refine your skills. ONeil has found that only 1 or 2
out of every 10 stocks you buy will truly turn out to be outstanding and capable of large
gains. You need to cut your losses short so your thinking does not become unfocused,
and you must make sure you can think rationally. With experience, both your results and
your skill level will improve if you stick to your rules.

Discipline and Facts

ONeil could be described as both a positive thinker and a strict disciplinarian. He has
kept to the facts and the reality of what actually worked in the market over a long
period of time, and his discipline has contributed handsomely to his success.
He is mostly bullish and very optimistic about the opportunities in American
companies due to the vast entrepreneurial spirit and track record of success in this great
country. Because history has produced an overall upward trend in the market over the
years, he is much disciplined in his approach of staying fully invested in bull markets
and mostly on the sidelines during bear markets. In 1989, he stated that he only made
significant profits in two of the prior nine bear markets, and he estimates that he has
been profitable on approximately 66 percent of his trades.
As mentioned previously, and just as the other greats before him also did, ONeil
performs a postanalysis of all his trades. At the end of each year he reviews and marks
on each chart the exact price he purchased the stock for and then the exact price he sold
the stock for. Then, and perhaps most important, he states the reasons why he made each
purchase and sale. He uses these notes to keep learning from both the mistakes he made
and what reasons produced the winners. He also believes that when you buy a stock,
you should write down the potential price youll sell the stock for before you actually
sell it.
From his loss-cutting rule, it is either 7 percent or 8 percent below the purchase
price. In his best growth stocks, he targets a top selling price of 130 percent growth in
the P/E ratio from when he bought it. In more challenging markets, he looks for 20-
percent gains. Here he uses the P/E ratio expansion as a measure of when to sell after a
large increase as opposed to a buy measure based on how low the PE might seem
(similar to how Loeb utilized the P/E ratio). This discipline to the handwritten policy
proves for him that the hard analysis of your past decisions is a key learning tool to
keep you from getting into trouble in the market and deviating from sound buy and sell
rules.
The fundamentals of a stock play a large factor in his decision to purchase, as he
believes it is crucial to get to know what the company does. Another characteristic of a
potential target is that the best performers usually introduce some new product or
service offerings. The best stocks represent companies that simply pave new avenues
for businesses or consumers, which leads to a strong and increased demand for their
products and/or services, causing increased profit streams to those companies. This
fact has proven itself over and over again, as each new market cycle produces new
names with new ideas and offerings.
Once ONeil has studied the fundamentals searching for the very best stocks to buy,
he uses technical clues to guide him on when to actually purchase the stock and to alert
him to problems well before the fundamentals will indicate to sell the stock. He has
proven that correct chart analysis is very important, and if done correctly, assists in
timing for profitable results.
Again, this has been proven over the years, especially during the most recent bear
market that began in 2000. Many high-ranking, strong, fundamental stocks started to
break down well before the financials supported the weakness of the stock or negative
news was made public. Enron and WorldCom were the most extreme recent examples
of late. This is because the market always discounts news and looks ahead (usually up
to six months). You simply should not trade on news; you should trade on what the
market is currently doing at the time. This takes extreme discipline, especially in
todays environment, as it seems confusing market news and opinion are more common
and prevalent from many different sources.
Of all the technical and market indicators available to traders today, you must be
able to discipline yourself to filter out the less important ones. Psychological indicators
should only be used as secondary indicators after the general market and the price
action of the leading stocks. Some of the more valuable secondary indicators include
the put/call ratio, and the bulls and bears investment advisory statistics, which state
how many investment newsletter writers are either bullish or bearish. But there simply
is no need to concern yourself with all of the less reliable indicators. The action of the
market itself and the leading stocks will dictate to you what needs to be done.
Regarding taxes, ONeil also believed them to be a secondary consideration when
looking at a trade, as did the great traders Loeb and Darvas. First, you must work to get
the highest return possible using sound rules and disciplines and not changing these
rules based on tax issues. Your initial goal is to make a profit, and a large one at that,
and then you should look at tax consequences as a secondary concern.
Consistent with all the other great traders featured is ONeils belief in not
overdiversifying. Instead, he would keep his concentration on the very best stocks and
watch them carefully. He believes in even allocation. For example, if you have
$100,000 to invest, you only need to invest in five or six stocks. You should not buy all
the stocks at the same time, but allocate an approximate even amount for each issue.
This concentration and focus is what leads to the best returns. Then you can weed out
the weakest ones and follow up and allocate more to the strongest performers. This is
similar in strategy to how Loeb would prune his portfolio at certain times, eliminating
the worst 10 percent of his performers. This discipline allows you to focus better and
follow the daily price movements of your stocks looking for clues to buy more, sell
some or all, or hold your positions.
ONeil believes in disciplining yourself to evaluate the market closely every day,
as turns in general market direction can come fast and without warning. He notes that
bear markets usually end when business is still in a downtrend, and in bull markets
business conditions usually start to slow or decline before a recession sets inand
especially before a recession is officially announced. These are the forward-looking
elements of the market and you need to be disciplined in your daily study to notice
them.
Understanding how markets act during different cycles is also crucial. Bear markets
usually open strong and close weak, and in bull markets, days usually open weak and
close strong. Growth stocks usually peak when their earnings are still solid and most
analyst estimates are rosy. It takes a keen eye and the ability to filter out the noise to
objectively concentrate on strictly what the market is doing and not to get distracted
from the facts.
ONeil does not believe in using stop orders, but he prefers market orders. He
thinks that stop-loss orders show your hand to the market makers, which can allow the
market makers to try to force your order to be executed by dropping the stock.
However, these stop-loss orders can provide some benefit if you cant watch the market
every day (such was the case with Darvas). This then becomes your protection against
adverse moves. Stop-losses also can discipline your sell side if you find yourself
unable to stick to an automatic market order loss-cutting strategy.
In disciplining yourself to study the market each day, it is crucial to understand
historical patterns. When markets top and stop increasing in their advance, they will
usually always show you no more new proper buy candidates, as the leaders are
beginning to top out and no new good bases are forming. As for spotting market
bottoms, sessions when the averages close higher than the day before is the beginning of
an attempted rally.
However, you then need the follow-through day to tell you if the rally has been
confirmed or not. The follow-through day should have the major averages rising 1.7
percent to 2 percent or greater with a noticeable increase in volume. The best occur
between the 4th and the 7th days. Some confirmations can occur from the 10th to the
20th day. The follow-through day gives you the confidence to begin looking for
attractive buys of leading stocks that are breaking out of sound bases. No new bull
market has ever begun without a follow-through confirmation, though it does not mean
all will succeed. The best opportunities usually occur within the first two years of a
new bull market, so it pays to be ever observant.
ONeil is a big believer in doing your own research and making your own
investment decisions. His whole strategy and the publication of IBD are based on this
premise. Few analyst recommendations are correct. Instead of relying heavily on
analysts personal opinions and recommendations, one should use only historical facts,
conduct their own research, study, and come to their own conclusions.
While Livermore and Loeb were professional tape readers (along with Jack
Dreyfus), ONeil believes tape reading is difficult and can become emotional (due to
the higher chances of getting caught up in the action of a stock that you are
continuously watching). To do it properly, it involves viewing the tape objectively and
getting a feel for the market and its current action and direction, and that takes
experience. Observant tape readers like Livermore and Loeb could tell whom the new
leaders were going to be coming off declines. ONeils publications alert serious
individual investors to these opportunities without having to view the tape constantly
throughout the day.

Never-Fail Rules

I highly recommended that you read ONeils publications How to Make Money in
Stocks, 24 Essential Lessons for Investment Success, and The Successful Investor to
fully understand the details of his strategies. You can also visit his investors.com Web
site, which has a learning center. This chapter is intended only to summarize the major
points of his detailed methods.
Before we begin to discuss the CAN SLIM investment research tool, we need to
address ONeils number-one trading rule: his loss-cutting strategy. He advocates
cutting all losses at 7 percent to 8 percent below the purchase price you paid for the
stock. This is his insurance policy to protect against much larger potential losses. He
sets it at that rate due to the fact that by using charts correctly and timing the market, you
should be able to keep your losses at those manageable levels. Over time, experience
will allow you to cut them even shorter. He believes that how an investor thinks about
losses is crucial, as most people lose money in the market because they simply cannot
accept taking small losses and admitting they were wrong in their initial buy decisions.
This rule serves as the basis for eliminating one of the most difficult things to do in
stock trading, which is to remove the emotional part of selling and trading. Following
this loss-cutting rule forces you to adhere to a strict set rule, and the process then
becomes automatic. Emotions in investor psychology are so strong that you must
develop strict rules and follow them diligently.
As ONeil states, all stocks are bad and there are no good stocks unless they go up
in price. This is similar in thought to the other great traders profiled in this book. Here
again we see the most important rule is the loss-cutting rule to protect your capital.
Probably nowhere has this proven more true than the bear market that began in March
2000. Those who didnt follow this cardinal ONeil and IBD rule have probably
suffered devastating losses over the past few years.
As mentioned earlier, historical research of how the market has actually worked for
nearly half a century helped ONeil build models of what characteristics the best
performing stocks had just prior to making their incredible moves upward in price. This
study also kept him from listening to others and all of the so-called experts. His rules
are based solely on how the market actually works, and he listens only to these time-
tested and successful rules instead of getting polluted by outside influences and
naysayers.
The CAN SLIM method is made up of approximately 60 percent analysis devoted to
fundamentals and 40 percent to technical analysis. ONeil conducts extensive research
into the fundamentals to find the very best stocks to invest in, and he uses technical
analysis to time the optimum buy and sell points of individual stocks.
ONeils trading strategy is based on extensive research of the greatest performing
stocks since 1953. Each letter in the CAN SLIM acronym stands for a key characteristic
of the greatest performing stocks before their greatest price advances. A summary of
each of the seven characteristics follows.

CCURRENT QUARTERLY EARNINGS PER SHARE


This fundamental trait stood out as the most important with the biggest winners. This
method stresses choosing only the very best stocks. Due to the heavy emphasis on
profitable performance of a company to drive stock prices, ONeil looks for quarterly
earnings to be growing at rates of 25 percent or more. Of the 600 best performing
stocks since 1953, 75 percent of them had earnings increases of greater than 70 percent
in the quarter prior to the beginning of their large price advances. The other 25 percent
had a 90-percent increase the very next quarter. Sales, also a fundamental trait, shows
strong demand for a companys product or services and these great stocks had increases
of more than 25 percent. Acceleration of sales and earnings growth rates is also very
important, and the stronger the acceleration the better.
His studies have proven that profitability is one of the main keys to the performance
of a stock, just like many of his predecessors believed. He has discovered that three out
of four of the biggest winners were growth stocks that showed 30 percent or greater
increases in EPS (earnings per share) growth rates for the prior three-year period
before they made their big moves. Growth stocks are defined as those companies that
average at least 20 percent growth in sales and earnings on an annual basis. They will
usually have higher P/E ratios than most other stocks, and the best usually have ROEs
(return on equity ratios) of greater than 17 percent. The best performing stocks of the
1990s had P/E ratios of 31 before their large price moves. These P/E ratios then went
on to the 70s range during their price rise.
Investors who adhere strictly to low P/E ratio stocks would simply have missed out
on the very best winners, due to their having what value investors would consider too
high a ratio at the opportune time to buy these stocks. Earnings and sales growth are
simply the main keys in the fundamentals that have contributed to the best gains over
time. This is just a fact, and it has been seen over and over and cycle after cycle in the
stock market. The strong earnings and expectation of great future earnings is one of the
main reasons why professionals bid up prices of certain stocks.

AANNUAL EARNINGS INCREASES


Look for annual earnings increases of a minimum of 25 percent for each of the last three
years. EPS ratings in IBD combine the two most recent quarters earnings growth rates
and the three-year annual growth rate. They are then compared to all other public
companies. You want to seek ratings of 80 (out of a 1-99 scale) or better to weed out
the weaker stocks. Many of the best rate 90 to 99.

NNEW P RODUCTS, NEW M ANAGEMENT, NEW P RICE HIGHS


New products and new services are tied to a stocks performance. Buy at new price
highs coming out of sound chart base patterns. You want to buy when the price looks too
high to the many and sell after it goes substantially higher and finally looks attractive to
everyone else. You also would like to see something new, whether it is in management
and/or new products or services that are introduced in order to spur demand for those
companies products. Many companies had IPOs in more recent years.

SSUPPLY AND DEMAND


You want to seek out how many shares outstanding a company has and also look for
large increases in volume as the stock makes new highs in price. This action implies a
strong demand for the stock. Smaller capitalization stocks are easier to move up in
price, and also down, which is why you need a strict loss-cutting rule. Also look for
excessive stock splits, as most stocks will top out around their second or third split. A
companys buying back its stock is also a plus, as it shows management has confidence
in the stock. Low debt-to-equity ratios are sometimes desired, and strong volume on up
days and lower volume on down days are preferred. The best performers had less than
25 million shares of capitalization. So you dont have to restrict yourself to large cap
stocks. Many times the best gains come from the smaller issues, although many midcap
stocks are also fine.

LLEADER OR LAGGARD
Buy the strongest leaders of the best groups. Some of ONeils biggest winners (in long
positions) were:
A leading stock is the best in its group with the best earnings, ROE, and price
action. The RS (relative strength) rating is a way to tell if the stock is a leader. It
measures price performance against the general market for the past 52 weeks. The
average was 87 (on a 1-99 scale) for the best stocks before they made their huge price
advances. Growth stocks tend to correct 1 to 2 times the market. The best stocks
tend to drop the least and are usually the leaders of the new bull market. You need to
confine your buys to the top two or three stocks in the top industry groups. This forces
you to buy the very best quality.
ONeil also has proved that certain industry groups and the strength of the industry
is a key trait of the very best stocks, as the other great traders also discovered. You
want to be sure youre invested in the top 20 percent of the groups that are currently
leading the market. Look for new price highs within the strongest groups. Also, look to
see if the market is currently favoring big cap stocks or small cap stocks.
Studies show that 37 percent of a stocks price movement is directly related to its
industry group and another 12 percent is related to the stocks sector. Therefore, nearly
50 percent of a stocks price movement can be attributed to the group that it is a part of.
The sector is the broader category, and the industry group is more specific.
Also avoid buying stocks that dont have at least one more stock in the group
showing strong performance. This is similar to Livermores observation of how the
best-performing leaders usually have peers in the same group also performing well. A
true leading group will consist of several other stocks showing promising strength.
Use volume to measure demand, as that is your best indicator in the market of what
the demand for stocks is. ONeil has shown that institutional support drives 75 percent
of the market activity. IBD shows volume percentage changes for all stocks. It shows
the average of each stocks last 50 days of volume trading and daily volume percentage
change, so you can quickly see where the current high-volume action is taking place.
An example of how groups react within the market was when the Gold group rose
to the top of the market as a leading industry group in February 1973, right before the
beginning of the bear market of 1973 and 1974. This served as a clue as to what was
coming by observing market group action, as gold is historically viewed as a defensive
industry. The stock market is like a giant mirror that reflects the basic conditions,
political management and mismanagement, and the psychology of the country. Its
crucial to understand this and know how groups and leaders act.

IINSTITUTIONAL SPONSORSHIP
Make absolutely sure that at least one or two leading (best performing) institutions hold
a stake in the stock you are considering and the stock shows an increasing number of
institutions taking positions in recent quarters. Because institutions account for 75
percent of all relevant market activity, following their activity is crucial.

MM ARKET DIRECTION
This, even though it is listed last, is the most important element in the CAN SLIM
method. Its the most important because you could be correct on all the others and miss
this one when the market is not acting correctly, and you would have a hard time making
gains. It is important to know which stage of the market you are in. Because 75 percent
of all stocks tend to follow the lead of the market, it is crucial to always know the
current environment. You need not be able to predict where its going, but
understanding exactly what it is doing currently is what counts.
As you can see, ONeil places a great deal of emphasis on research. This is
important. The market is not supposed to be easy. His proven methods have been
devised from intense study of how the market actually operates, and he has created
many unique resources for individual investors so they can assess quickly which stocks
stand stronger than others as far as fundamentals and technicals are concerned. This is
why it is crucial to study and read IBD on a daily basis.
There are other important stock traits that ONeil has discovered that have been
contributors to a stocks great price performance over many decades. Among them is
relative strength (RS).
Measured against both the general market and against other stocks, IBDs RS rating
is the price of the stock calculated one year ago and then taking the current price and
calculating the change and comparing that stocks RS to all others. This shows how
strong, or weak, a stock is performing in price in relation to others and the market. The
average RS of the best, since 1953, was 87 before they made their huge price advances.
The rating is also based on a 1-99 scale, as are most of the other IBD proprietary
ratings. ONeil recommends a rating of at least 80 or higher. You need to understand
and look for these stocks that gain in ground during down markets and constantly
perform well against other stocks and the market.
Another trait is the accumulation/distribution rating, showing if a stock is being
accumulated (bought) or being distributed (sold) by big institutional investors. IBD
tracks the last 13 weeks of this activity in each stock. A sponsorship rating determines
if funds and large investors have been buying or selling stock. Again, it is important to
follow the lead of institutions that are taking positions in the leading growth stocks.
ONeils study of charts discovered certain price consolidation areas or specific
base patterns that occurred over time. These patterns formed just before the stocks took
off to reap large gains, and they have occurred over many different markets and many
different time periods. Patterns are formed due to corrections in the overall market, and
the charts of stocks graphically illustrate supply and demand for a stock. You must be
able to understand chart reading in order to properly determine correct buy and sell
points and properly determine when trends are changing. ONeil keeps the vital aspects
of charts simple, using basic price and volume as the key drivers. Like the others before
him, the volume and price action of the stock are the best determinants of supply and
demand. With all the other technical traits available, one need not get confused, but
stick to the basics of price and volume.
ONeil looks for patterns in stock charts that have repeated themselves over many
time periods, and as Livermore also stated many years ago, patterns in stock action will
repeat themselves over and over again. The most common pattern ONeil discovered
was what is called the Cup-with-Handle (see Figure 5-1). This pattern resembles the
silhouette of a coffee cup from the side. It shows a sloping downward left side, a
bottom, a rising right side, a handle, and then a pivot point that acts as the ideal time to
purchase the stock as it breaks through that point at the handles peak on an increase in
volume.
Figure 5-1 Cup-with-handle formation. Source: www.investors.com (IBD Learning
Center)
The best stocks showed at least a 30-percent price uptrend before they began their
Cup-with-Handle formations. The minimum time for this pattern to form was between 7
or 8 weeks, though some stocks take as long as 15 months. Most will decline between
20 percent to 30 percent from the absolute peak (point 1 in Figure 5-1) to the low of the
cup (point 2). The handles (points 3 and 4) are usually short and last between 1 to 7 or
8 weeks and need to slant downward on decreasing and lower-than-average volume.
This weeds out the remaining weak holders of the stock. The handle pullback should
fall no more than 10 percent to 15 percent during bull markets.
The pivot point (point 5) resembles the point of least resistance. It is currently. 10
of a point above the peak of the handle area. It is the new high of the handle but is
typically below the actual old high of the stock. This pivot point becomes the point for
the least amount of risk. After all the remaining skeptical stockholders are washed out,
the stock is able to make new highs in price without overhead resistance. Volume
should accelerate considerably (50 percent or greater than its average) when the stock
breaks through this point. This confirms the strong demand for the stock and proves
bigger investors have taken an interest in the stock.
Figure 5-1 is the chart of U.S. Surgical. Once it broke through its pivot point in
April 1990 at $60 a share, it appreciated an impressive 767 percent over the next 22
months. The fundamentals of the company were also top-notch, and other leading
medical stocks and medical groups were showing very strong leadership at the time.
Buying at new highs seems uncomfortable, but its actually buying into emerging
strength and is key to great potential gains. Again, we see a strategy of buying stocks
near their highest prices, as opposed to buying at their lowest prices and looking for
bargains. Even today, as the greats proved going back more than 100 years, this is the
way to correctly time your buys for large gains, but is looked at as not being the correct
way to purchase stocks by the majority of less knowledgeable investors.
ONeil also proved this when he started creating his rules after analyzing the more
than 100 stocks he studied with the Dreyfus Fund purchases of the late 1950s. All of
them were purchased as each one established a new high in price after coming out of a
base-forming pattern. The key is to concentrate on the leaders making new highs. Use
the motto buy high and sell a lot higher. Cheap stocks are cheap for a reason, and
most will never make it back to their former high prices.
The next common chart pattern is the Double-Bottom base (see Figure 5-2). This
looks like the letter W. Its characterized by a price decline (points 1 and 2), then an
initial upward trend (points 2 and 3), and then one more decline (points 3 and 4) before
the stock returns to its previous high (points 4 and 5). The right side of the W should
drop slightly lower than the left side, as that shakes out the last remaining weak holders.
The pivot point on a double bottom pattern is located on the top right side of the W,
where the stock is coming up after the second leg down (points 6 and 7). This point
should be when the price surpasses the highest point in the handle by at least .10, or the
peak price in the middle of the W when a handle has not occurred.
Figure 5-2 The double bottom base. Source: www.investors.com (IBD Learning
Center).
The stock illustrated in Figure 5-2 was American Power Conversion. After
breaking though its pivot point and crossing $22 a share, it zoomed to an 800-percent
increase over the next 22 months. It also sported first-class fundamentals before the
stock broke out.
The next pattern is the Flat Base (Figure 5-3). This usually occurs as a second stage
formation after a Cup-with-Handle base as the stock continues trading sideways (points
1 and 2) and not correcting more than 8 percent to 12 percent. They usually last for at
least five or six weeks. This quiet action is actually very constructive. A new pivot
point (point 3) is then established as you wait for the stock to rise past the pivot point
on increased volume. Make sure not to chase the stock if it has already risen 5 percent
past the pivot point, as you may be shaken out due to your loss-cutting rule if the stock
temporarily falls back or slightly under the pivot point. Again, please refer to ONeils
published books for greater detail and more graphic presentations of these key stock
patterns.
Figure 5-3 The flat base. Source: www.investors.com (IBD Learning Center).
The stock featured in Figure 5-3 is Amgen. It was a leader in the medical field at
the time and produced outstanding fundamental results prior to its huge run-up in price.
The stock, from April 1990 to early 1992, staged an impressive gain of 640 percent.
When looking at chart patterns, you should always avoid wide and loose bases as
they are more prone to failure. Stay with the tighter bases and the better-controlled
price patterns. This helps to minimize your risk. You can see these patterns fairly
clearly the more you get better at analyzing charts and certain chart patterns. Also,
avoid fourth-stage bases on the way up, as they are prone to failure. They tend to fail
nearly 80 percent of the time. By the time a stock has formed a fourth-stage base, almost
everyone has heard of the stock, and it will most likely lack future buying power.
A sound base in a stock has the following characteristics:

Has more weeks up in price on greater than average volume than down weeks on
greater volume
Has shown some tight weeks showing little or no price change
Has shown huge weekly spikes in volume on price increases once or twice
within the last year or 12 months

ONeil has shown that 40 percent of all stocks that break through their pivot points
will fall back to the pivot point in their base. Some normal pullbacks after the pivot
might include two or three down days in increased volume to the pivot point. Be patient
and wait to see what happens, as this is a normal reaction. Also, if a stock trades under
it 50-day moving average line for only one or two days, this is also considered normal
in many cases.
Its important to understand how these stocks behave as you analyze their price and
volume action. Charts represent human nature and investor psychology and past actions.
This does not change in the marketplace, and it will repeat itself over and over again in
future markets, as history continuously repeats itself in the stock market. That is why it
is important to understand that with proper study, analysis, and research in how to
correctly interpret stock chart patterns, you can significantly increase your results.
Downtrends and bear markets are actually constructive for the market, as they
create new bases for the next round of new leaders to emerge. So never give up when
the market isnt acting right, and use bear markets to do more research and analysis.
As with the others, one of ONeils crucial trading rules is to follow the general
trend of the market. In following the general market, it is important to understand what it
is currently doing and look for tops when it has been rising for some time. Because
most stocks follow the general market, four or five distribution days (heavy selling) in
the market averages over a two- to four-week period could signal a top in the general
market. This is when you stop buying stocks and begin looking to sell stocks. Market
tops always give signals to the alert traders and astute investors.
History has shown that markets have given plenty of sell signals and topping signs
in advance of their major collapses. Its the hope of investors that usually will prevent
them from spotting these signals or cause them to ignore them, leading to increased
losses. The best time to sell stocks is on the way up in price, when they are still
advancing and looking strong to everyone else. Another great sell signal is to notice
when you are tickled to death and happy as can be.
After declining for some time, markets always recover and come back. This was
Baruchs favorite time to take action in the market. The astute trader needs to look for
market bottoms and the confirmations off the bottom. Bottoms will usually occur after
the corrections of bear markets with an increase in the major averages from the prior
day. After the initial up day, four to seven days into the rally you need to look for a
follow-through confirmation, as mentioned earlier. These initial rallies do have a 20-
percent failure rate. The best big stock winners usually emerge during the first 10 to 15
weeks of a new bull market. There is simply no substitute for success, and one of the
leading factors in stock trading is understanding day to day what the market is currently
doing.
The pyramiding strategy that others used is also a key trading rule of ONeil. He
adds more to his initial purchase after the stock acts correctly from his first purchase. If
the stock moves up 2 percent to 3 percent from his buy point, he will buy additional
shares and average up. He advises this pyramid approach, and it has attributed to large
gains for him throughout his career. For example, if you want to invest $20,000 in one
issue, you should buy half or $10,000 on the initial purchase. If the stock moves up 2
percent to 3 percent, then you buy the next round of $6500, and if it continues to move
up, then you purchase the last $3500. This pyramiding up and allocation of the initial
intended amount to invest is a prudent leverage strategy that many of the others also
proved for realizing increased returns.
ONeil believes its best to work with dollar amounts as opposed to the number of
shares. If you have a successful position and are showing a substantial profit, then you
can add more shares as the stock builds another base or bounces off its 50-day moving
average, assuming it has not violated any of the other sell rules. Its also important to
never let a gain turn into a loss. His profitable experience in Pic-N-Save was achieved
as he continued to buy on the way up. He bought that stock 285 different times over 7
years. The early purchases in that stock realized him a twentyfold gain.
ONeils buying rules could be summed up as follows:

Concentrate on listed stocks trading at least $20 per share or Nasdaq leaders $15
and higher that have institutional support
EPS should have increases in each of the past three years, and the current
quarterly earnings must be up at least 20 percent
Stock should be about to make a new high in price emerging from a sound basing
pattern and be accompanied by at least a 50-percent increase in their volume for
the day

He doesnt buy stocks trading under $15 per share, as he believes that cheap stocks
are cheap for a reason. The study he conducted going back to 1953 discovered that the
average price, before the greatest stocks started their major price moves, was $28 per
share. Typical investors love low-priced stocks. ONeil does not.
He also usually doesnt recommend purchasing IPOs (initial public offerings)
because they have not established proper bases and trading patterns yet. The best time
to buy fundamentally strong new issues is when they are coming out of their first
established base on a breakout, usually two or three months after the IPO. The majority
of the best performers, he discovered through his research, are stocks that came public
within the prior eight years.
To sum up all of the research he has conducted, he offers three keys to success:

Have a set of buying rules that limit your purchases to only the best and
fundamentally strong companies. Use charts to determine the correct time to buy
these potential leaders.
Have a set of selling rules. Cut all losses short at 7 percent to 8 percent below
your cost. Learn how to take your worthwhile profits according to your sell rules.
Learn how to read the general market and be able to decipher what stage the
market is currently in and try not to predict what it will do. Study it every day.

And his three basic overall rules are:

Specific strategies for stock selection


Rigorous risk control
Discipline not to deviate from the two above

As for short selling, he believes it is hard to succeed at and should only be


performed by the most experienced traders. If you do try shorting, you should only
confine your short transactions to bear markets and limit your losses and dont short
small capitalization stocks or stocks you think are too high in price. The two best chart
patterns to use for shorting are the head and shoulder top and third- or fourth-stage
basing patterns.
There will always be less-successful investors, some academics, competitors, or a
few know-it-all cynics who will confidently claim that charts dont work. They say
you cant time the market; CAN SLIM wont work; cutting losses is bad advice;
averaging down is OK...just buy low, diversify widely, be a buy-and-hold investor;
dividends, book value, and low PEs are whats important.
ONeils 40 years of results have proven conventional wisdom to be exceedingly
faulty and, at times, extremely risky. The CAN SLIM method has also produced a
number of millionaires. If you attend one of his Advanced Investment Workshops, youll
usually meet a number of long-term advocates who will be up 50 to over 100 percent
for the year in any decent market period.
The American Association of Individual Investors has performed an independent,
real-time, study monthly since 1998 of more than 50 of the best-known methods of
investing. It stated, The long-term leader in the growth category continues to be the
ONeil CAN SLIM approach, generating a 503-percent gain over the past 5 years
without a single down year. The results of their objective, validating study appeared in
their AAII Journal of August 2003.
William ONeil has dedicated his career to the meticulous study of the stock
market. His hard work has definitely paid off, as his success has earned him a highly
respectable reputation in the securities business and has afforded him wealth. Many
individual investors, myself included, have many thanks to give to ONeil for all the
fact-based information he has provided to independent investors and stock traders. One
could only imagine how much better the results of Livermore, Baruch, Loeb, and
Darvas would have been had they had access to ONeils research, proprietary stock
database, and tools such as Investors Business Daily and the companion Web site
www.investors.com.
Figures 5-4 through 5-7 show five-year stock performance graphs of ONeils
biggest winners in the late 1990s. The charts illustrate at a glance how clearly one can
see price and volume action in these stocks. They are not intended to show ONeils
exact buy and sell points of these stocks. Rather, you can that see that in 1998 and 1999,
these stocks were making large gains on increased volume activity. Also, the general
market was in a very strong uptrend, and these stocks were the leaders at that time. The
charts clearly illustrate how leaders can propel upward when the market environment is
in a strong uptrend. The charts show all the way out through the first quarter of 2003.
They demonstrate that with no loss-cutting strategy in place, or profit-taking rules, the
large gains made in the late 1990s would have been completely wiped out if the
investor had held on for the long term as opposed to taking the market cues of when to
exit a profitable stock. ONeil was out of these stocks near the top and kept his
substantial gains, while buy and holders stood by in disbelief as their once mighty
paper gains faded away and turned into substantial losses.
Figure 5-4 America Online. Source: www.bigcharts.com.
Figure 5-5 Qualcomm. Source: www.bigcharts.com.
Figure 5-6 Sun Microsystems. Source: www.bigcharts.com.
Figure 5-7 Charles Schwab & Co. Source: www.bigcharts.com.
6
Strategies of the Greatest Traders

After reviewing the profiles and strategies of these five successful stock traders that
cover every year of the stock market from the early 1890s to the present, it is interesting
to see how each of the traders adopted similar strategies and disciplines. As some of
the chapters outlined, there were references made to the traders before them. For
example, William J. ONeil studied Gerald M. Loeb and Jesse Livermore extensively.
He has mentioned them in past interviews, and he references many of their published
works when he recommends books and reading material on the stock market and
trading.
Darvas mentioned in the Time magazine interview that he would reread Loebs
classic The Battle for Investment Survival every two weeks just to stay disciplined to
the rules. To him this resource was a valuable guide in helping him keep his focus.
Each trader battled different market environments, though some overlapped certain
years. The exception was Livermore and Baruch, both of whom were active at the same
periods during their trading careers.
We read about how they all made mistakes early in their experiences and lost
money, proving that they were human as well. We also saw that it does not take a great
amount of capital to get started and to grow that capital into substantial wealth over
time. Livermore started with only a few dollars (and that was in 1892), and ONeil had
only $500 when he placed his first trade.
The early years of their careers resulted in losses that drove each of these five
traders to understand why, and to analyze the actions of the stocks that caused these
losses. They proved that with the proper attitude and determination, learning from
mistakes, and establishing rules that work, it is possible to attain the monetary rewards
that many dream about as they enter the world of stock trading. One thing these great
traders have proved is that it is not easy, and the belief that many have of making quick
riches without much effort is a false one.
We will now examine the many common trading strategies each employed as they
struggled through their early years, searching for ways to succeed in the market. During
the many years these traders covered, common traits, disciplines, and trading rules
applied to all of them.
Common Skills

The number-one skill required that was common to all these traders was a strong work
ethic. We saw from each that the amount of effort, dedication, and work put forth in the
effort to succeed was a crucial factor to the success of each. This should come as no
surprise, as many mentioned that to become successful, and especially to attain the
highest levels of success, it takes hard work to get to the top. It is no different than in
any other profession. What is worth the rewards requires the efforts to gain the
rewards.
All, except for Darvas, concluded that due to the effort that was required, it took
ones full-time attention to the task. As mentioned, Darvas was the only one not
involved in the securities or trading business on a full-time basis. But determination to
succeed took most of his time outside his other profession. Actually, he mentioned that
he spent eight hours a day studying the market. This for most would qualify as full time.
All learned that due to the hard work required to profit in the stock market, the
rewards were not going to come overnight. Rather, the time element proved that, like
most other rewarding endeavors, overnight success does not happen very often in the
stock market. If and when it does occur, it usually doesnt last long without the proper
attention, effort, and sound trading rules being implemented.
Observation and study were requirements. These were vital compliments to the
hard work that was required. Each would study the market and look to understand the
way the market reacts and how they could benefit from the opportunities in the actions
of the market.
Each learned that experience was key. They learned from their mistakes just as they
learned to pay attention to the varied lessons they learned along the way. The
experience one gains as one heads down the path of any venture must be remembered so
that when similar situations arise in the future, those experiences and memories can be
recalled to avoid repeated mistakes. This is especially true in the market, as it has been
shown that patterns repeat themselves in stocks and market behavior year after year and
cycle after cycle.
All the traders featured here struggled with the enemy that every stock market
participant experiences, which is uncontrolled emotions. The skill required is to be
able to keep the emotions under control. In order to do this, all these traders created
sound trading rules that worked well for them. By following strict rules, they were able
to control the emotional part of trading that can overcome and cause rather normal,
intelligent people to act in ways that they otherwise would not act if they did not have
their hard-earned money on the line. Throughout this book, emotional control is
discussed as a skill, a discipline, and a result of specific trading rules being
implemented. The emotional balance, while active in the market, is simply a trait that
the very best were able to control. In order to do this, you have to have real money on
the line, and you need to experience sometimes gut-wrenching losses in order to
understand how unrestrained emotions can become a stock traders worst enemy.
Loeb and Darvas discussed certain personalities or characteristics that could be
attributed to certain stocks. Loeb probably best described it as stocks having stages
similar to those humans go through. Infancy, growth, maturity, and decline describe both
stocks and humans. The best gains are made in the growth phase. ONeil discovered
that stocks followed certain patterns over time, that these patterns repeat themselves,
and the best stocks have similar patterns and bases. Being able to identify certain
patterns and at what stage a stock was in contributed to each of their successes.
Having the drive to attain high goals and success was a trait common to these great
traders. Loeb and Darvas especially would comment that it was vital to them to have
very aggressive goals and aim for the highest returns possible. Livermore, Baruch, and
ONeil obviously had the drive and perseverance to push themselves to the limits in
obtaining their goals as well.
Sound judgment and thought, common sense, and humility are key skills one must
employ in participating successfully in the ever-challenging environment of the market.
Intelligence definitely helps and is required, but one does not need the highest levels of
intelligence to succeed in the market. In fact, higher intelligence can sometimes lead to
ego and overconfidence problems, which can be devastating and costly in the stock
market.
Finally, the skill of being able to react quickly and the ability to change was key to
all of their successes. Though Livermore was quoted as saying that the markets never
really change due to human nature, the markets do change in the sense that they adapt to
new companies, new improvements in business, economics, and world events. His
statement related to how people react to events, which does not change much due to
certain human traits. Due to market cycle changes, one must be able to react to these
changes. As opposed to the buy-and-holders, who purchase a stock and hold it forever,
many recently have discovered that the inability to change and react with the market can
be extremely costly. Enron, WorldCom, and many more over the years and decades
were once regarded as blue chip companies. Those who purchased and ignored the
market environment and the action in the stocks that declined significantly and then
became unlisted and names for the history books will certainly not make the list of
distinguished names in this book.
The skills listed above were discovered by all these traders in their quest for
success. Most are basic and seem logical; the difficulty is admitting they need to be
employed and refined with hard work, trial and error, and many years of effort.

Shared Disciplines
All of these traders discovered that being disciplined in their behaviors and their
approach to the market contributed to the control over their emotions, which led to
rational actions utilizing sound and proven trading strategies. This discipline is learned
over time, as they all experienced setbacks in the early days. Discipline became part of
the learning process and was used to force them into adhering to the rules of each of
their methods.
All shared the same thoughts on how tips and so-called inside information was a
hazardous way to trade in stocks. Everybody, it seems, has an opinion about some stock
and knows of some hot tip. Its the source of the information that should always be
questioned. Many of these traders all learned the hard way about taking advice from
others. Livermore lost plenty listening to the Cotton King, Percy Thomas. Baruch lost
all of his original capital, and a significant amount of his fathers as well, by listening
to a tip from an outsider. By seeking opinions from others, Darvas consistently lost
money after his first profitable success from the Brilund stock.
These experiences and more led all to believe that probably the most important
discipline is to do your own research and do not listen to others and their opinions.
Each one learned from reading on their own and then being able to make their decisions
and reach their own conclusions from studying the market, history, charts, etc., and then
constantly learning from real-life experiences. They all believed that no one can master
the market, but traders could succeed financially if they worked hard, kept learning as
they went along, and did their own research.
Even Gerald Loeb, in 1965, updated his classic The Battle for Investment
Survival, originally published in 1935, with new ideas he had learned over the next 30
years. William J. ONeil believed so strongly in the discipline to do ones own
research that he founded Investors Business Daily, so the independent individual
investor can have a resource to conduct unbiased, fact-based research. Even today,
some 70 years after the creation of the Securities and Exchange Commission, we still
have advice and information coming from some of the oldest and supposedly most
distinguished investment houses that is inaccurate, misleading, and found to be outright
worthy of fines, penalties, and banishment of analyst personnel from the industry.
Investors simply must be able to conduct their own unbiased research, and these great
traders have proven that it can be done very successfully.
Another common discipline among all five traders was that they all did a hard
analysis of each of their trades. For a trader, this is one of the hardest disciplines to
adhere to, but when one does begin and sticks to it, it becomes an important learning
tool. When these traders lost money, they didnt blame the market or their stocks. They
looked at their own actions and decided to analyze what they did that caused their
losses.
This statement is important. You must have the ability to take responsibility for all
of your own trades, and not look at the market as the reason for your loss. It simply is
not worth it to get angry with the market.
Instead, these traders learned that the key to reducing losses and getting on the road
to profits is to constantly analyze the trades one makes, and then learn from the
mistakes. They understood their successes so they could eliminate the loss-causing
actions and capitalize on the transactions that led to the profitable gains. All would
write down when they made their trades, and they would go back later and review
them, especially the losing trades. Its not easy to admit and then keep looking at your
mistakes as a reminder, but it helps in the constant learning process, and these greats all
proved that fact.
In doing their own research, all of them made sure they were silent about their
trades. Livermore and Darvas even mention using multiple brokers to conduct their
trades, as they did not want anyone to be able to track their actions. Loeb was so silent
about his trades that he didnt even mention his specific trades in his publications.
ONeil makes sure not to offer recommendations in the daily editions of IBD or
publicize his current positions.
Its one thing to have some winners in the stock market that provide some real
profits; its another challenge to keep them. Setting up a reserve account was another
common discipline with all the great traders. Baruch, Loeb, and Darvas all took some
of their profits off the table and put them away for reserve. ONeil funneled his early
profits into other strategic investments, such as a seat on the New York Stock Exchange,
his own investment research firm, and then the founding of Investors Business Daily.
Livermore struggled with this discipline more than the others, but was rumored to have
finally established a fund later in his trading career to avoid the times before where he
gave back the bulk of his gains.
The reserve account is the ammunition and inventory for the stock trader. In order to
be able to react quickly when the market changes, or when new and better stock
opportunities arise, the cash from a reserve account allows the prudent trader to take
advantage of those market opportunities. The reserve account also adheres to another
discipline of these traders, the ability to be able to stay away from the market when it is
wise to do so.
All thought that being in the market all the time was not a prudent trading strategy.
The market simply does not always offer the most opportune environment. Loeb and
Darvas didnt believe in being in the market during downtrends or bear markets, and
neither does ONeil. Livermore didnt think sideways markets gave any opportunities
for profit, as he looked for activity either on the upside or the downside. Being out of
the market allows one to step away and refocus and then enter again when better
opportunities present themselves. This quiet time out of the market also gave these
traders time to do additional analysis of the market and price trends.
The discipline of constant analysis while out of the market is like a top athlete
training during the off season. You stay on top of your game and make sure you are
prepared when its time to trade again.
A key discipline of all these great traders that goes against almost all broker and
investment advice that most hear regards the topic of diversification. Many investors
are told to diversify their investments in order to reduce risk. Every single one of these
five traders could not disagree more. In fact, they all believed that the most profits
could be made in diversifying as little as possible, and they proved it by making
millions.
They all discovered through their many years of mistakes and experience that by
trading and holding only a handful of quality U.S.-based stocks that trade on the major
exchanges, if purchased correctly, during the right market environments, and then sold
correctly, one could make a fortune. This discipline to stay focused on just a few of the
leading stocks that were experiencing the highest demand at the time, and not
diversifying into all kinds of different investments that they were not experts at, led
them all to incredible wealth. Gerald Loeb said it best, The greatest safety lies in
putting all your eggs in one basket and watching that basket.
Relating to diversification in the sense of knowing what you are investing in, these
traders knew the importance of having knowledge of what they were trading in. Baruch
was a firm believer in doing as much research about a company as possible. He
attributed one of the main reasons for his losses to his lack of knowledge about the
companies he invested in. ONeil puts a great deal of emphasis on the fundamentals of a
company, as IBD supplies the investor with many fundamental statistics so one can
more quickly conduct qualified research. Disciplining yourself to know who the quality
leaders are and understanding the market environment are key ingredients to successful
stock trading.
Another key discipline that these traders employed that goes against some of the
more popular opinions concerning investments is the issue of tax considerations. The
traders who came along later, such as Loeb, Darvas, and ONeil, all regarded tax
considerations as secondary to first making as large a profit as possible, and then
thinking about how tax considerations would affect the trade. Many today might hold a
winning stock, and after it declines and shows classic sell signals, they hold on and
wait for a favorable tax consideration period. In the meantime their profits might be
totally wiped out due to the waiting period. The very best traders concentrate on profits
first and look at tax considerations second.
It is clear that many of the disciplines that were vital to the success of these traders
went against the grain of conventional and popular thinking when it came to stocks. Like
some other things in life, sometimes its best to take the road less traveled. If these
traders have proven for over 100 years that these similar disciplines have worked,
maybe its time more traders started to adopt them if their aim is to make large profits
in the market.
Common Trading Rules

A major key to profitable stock trading over many years requires sound trading rules
that have been refined through experience and fit the individuals strengths. All five of
these great traders created rules that kept them out of bad markets and gave them the
signals to take advantage of profitable opportunities when the market presented them. It
is a must requirement to adhere to strict trading rules in order to manage risk in the
ever-challenging stock market. Their rules were created and adjusted as they kept
learning, analyzing, and trying new ways until the results began to show positive
returns. Again, we will see that as each went through the same trials, even though there
were different periods of time involved, many discovered that similar rules resulted in
similar outcomes. This again proves that the market repeats itself and that historical
patterns have occurred again and again and will occur in the future as well.
The number-one trading rule for all was the rule of limiting their losses when they
had them. It was repeated over and over again in each chapter, and its repeated
numerous times in each of their publications. There is simply no better risk control
trading rule than to accept a small loss when you have one and move on to the next
stock if an opportunity presents itself. The ability to cut your losses quickly is what
separates the best traders from everybody else.
Even the greatest traders featured in this book, the very best and most successful
over time, experienced loss ratios of near 50 percent. Because no one will be correct
every time, its the ability to enforce this rule that keeps the profits in the expert traders
accounts and leaves the amateurs in disbelief, as they watch their stock keep going
down in price and do nothing about it. They refuse to sell because they consider
themselves long-term investors, or they have a tip from an expert and there is no way
that their stock could decline in price, or because they work for the company, etc. This
can create havoc on an individual portfolio.
Livermore and Baruch would limit their initial losses to 10 percent, due to the
margin requirements at the time. This automatic rule would force them out, if they were
on margin, so there was no holding on forever and wishing and hoping for a rebound
from a larger loss. Early on they both violated this rule when not using margin, but then
soon learned that the loss-cutting strategy was a crucial rule in keeping their earnings.
Loeb and Darvas both mentioned that they cut their losses under 10 percent. Their strict
adherence to this rule allowed them both to keep their profits. ONeil constantly
reminds traders in his books and in Investors Business Daily, that the loss cutting rule
is the number one trading rule. He advocates cutting losses quickly at 7 percent to 8
percent below your purchase price. He has mentioned that he actually averages less
than that due to his experience, probably in the 3-percent to 5-percent range.
With experience, all these great traders cut their losses under their specified
maximum limits. If you constantly study the market and see action that does not look
right after youre in a position, there is no reason to wait around for an 8-percent to 10-
percent loss. Take it quickly and move on to the next opportunity. Even through intense
study and years of experience, you just will not avoid losses, as the odds and market
environment do not allow for a perfect stock-picking record.
Even the best hitters in baseball only succeed 30 percent of the time. Baruch said it
best, No speculator can be right all the time. In fact, if a speculator is correct half of
the time, he is hitting a good average. Even being right three or four times out of ten
should yield a person a fortune if he has the sense to cut his losses quickly on the
ventures where he has been wrong. Many recent investors and traders have learned
this lesson the hard way since March 2000, when the market peaked, and they held on
to watch all their gains evaporate and turn into devastating losses as they failed to cut
their losses short.
Emotions have been mentioned many times as they can overcome a trader and lead
to inappropriate actions that eventually lead to losses. All these traders recognized the
danger of letting emotions take over, and that is the reason they all created their own
rules. The rules are used as a replacement to the unpredictability of the emotional
trader. Traders without rules will eventually succumb to emotional trading, which has
proved to be a losers game time and time again. The removal and control of emotions
cannot be stated enough to get the point across of the dangers they represent and can
cause.
Probably just as important as the loss-cutting rule was the understanding of how
important it was to know what the general market was doing at the time they decided to
enter and exit their trades. Ignoring general market behavior is a lesson one will learn
the hard way and its been proven again during the tough market environment starting in
the spring of 2000 through 2002. Those trying to buy against the grain of a bear market
soon learn how difficult it can be to try to go against the momentum of the market. All
these traders discovered, through their analysis, how most stocks react to the direction
of the general market.
Livermore would always stay out of market trends that were indecisive or
sideways. He would always make sure the market led first, and then he would trade
accordingly. Baruch discovered the best opportunities were when a market changed
directions coming off a correction, and he would buy into the new emerging strength of
an upturn. Loeb and Darvas learned to stay out of declining or bear markets. They
would stay observant and gradually buy into leading stocks as the market began to
change directions. ONeil constantly emphasizes the importance of watching the general
market. The M in his CAN SLIM strategy, he mentions, is the most important element
to watch, and his studies show that approximately 75 percent of all stocks follow the
direction of the general market. With those odds, it simply does not make sense to try to
make gains on stock purchases when the general trend is not going in the same
direction.
As we saw earlier, many of the trading rules that these traders implemented went
against the popular opinions of what was and is thought to be the correct way to invest
in the stock market. Its hard to argue with the success of their results, but many still
refuse to accept that their methods and rules can result in profitable gains. Probably the
most controversial rule that these traders enforced was that they would only buy stocks
when they reached a new high in price.
Livermore, Loeb, Darvas, and ONeil all discovered that the best gains came when
certain stocks would move past certain pivotal points and into new high ground. How
different does this rule seem when most think that the old saying of buy low and sell
high is the correct way to trade in the market, when in fact, that strategy did not
contribute to the millions of dollars in profits that these great traders were able to
produce. Rather, their strategies were based on a buy high and sell a lot higher
premise. They all thought that cheap stocks were cheap for a reason, and that they
usually get cheaper.
In fact, Livermore would like to sell short stocks that were making new lows. He
believed that if they had fallen that low, then they would most likely keep going lower.
Livermore was also one of the first traders to buy stocks as they made new highs in
price after crossing certain resistance levels. Loeb, Darvas, and ONeil also
discovered through their own analysis that that rule would apply in the markets they
traded in as well.
Another rule common to these traders was the use of pyramiding. Again, this rule
goes against a popular view years ago and still prevalent today of averaging down,
which is buying more of stock as it keeps declining. Pyramiding, as mentioned
throughout this book, is the process of buying more of a rising stock as it keeps
increasing in price. This strategy allowed all of them to leverage their winning stocks,
when their action would convince them when they were correct, and to compound their
gains by purchasing more of a strong stock as it kept getting stronger.
Each would continue buying at certain points until they were fully invested in the
amount they had planned for that issue. Dedicated attention and observation to what the
markets action was doing at the current time led each to employ this profitable strategy.
They all proved for over 100 years that if done correctly, pyramiding ones strong
stocks is the main key to realizing large profits.
Another mistake most traders make (that these greats did not) is to always look for
the old leaders when the market turns up again. The former leaders of the prior bull
market are rarely the same leaders of the new bull market. This makes sense, as the
economy and business conditions change and lead to new opportunities of expected
large future profits.
Many investors make the mistake of looking for the same old names that might have
provided them profits in an earlier market cycle. Sometimes this might happen, but
more often than not, its new innovative companies that lead the next leg of the market
to new heights. This too has been experienced over many decades, as each has
produced its share of names that were standout performers. Study and observation of
the market and new emerging leaders give the observant and reactionary trader the
early jump when the market eventually starts a new uptrend.
Volume in the market and stocks is sometimes discarded as unimportant by some.
The great traders did not see it that way. They looked at increases in volume on strong
up days in a stock or the market as the most illustrative picture of strong demand.
Volume therefore is the convincing element that there is an interest in an issue and, that
with other certain parameters, is a requirement for a stock to keep increasing in price.
These increases in volume for a stock as it was coming through a resistance level and
through a pivotal point was the clearest signal yet that strength was being directed to
that stock. They would jump on board after noticing this tremendous interest in a stock.
Of the many selling rules each of these traders implemented in their own strategies,
one they each agreed on and one that was a major contributor to their large gains, was
to hold on to their winners and not sell them too quickly. Many of them learned this
lesson, as their early trading tended not to produce large gains because they were
simply selling leading stocks too quickly in order to realize a small gain.
All discovered that no one could buy at the lowest possible price and sell at the
highest possible price. They would all sell into the strength of a stock, as that is when
all the smart money is selling. Livermore, Baruch, and Loeb were all mostly out of the
market when the Great Crash occurred in October 1929. As mentioned earlier,
Livermore saw it coming and shorted the market and had his best payday. They left the
market before a major correction occurred, selling their rising positions on the way up
or selling their profitable positions when they began to top and started to decline.
Instead of holding on and wishing and hoping, they followed the action and reacted
accordingly.
Darvas would always be out of a profitable stock as it began to decline
significantly due to his stop loss orders. ONeil mentions how he was out of the 1987
market in August, as leading stocks and the market gave their topping signals. He
therefore avoided the miserable day of October 19, 1987 when the Dow fell more than
20 percent in one day. In the spring and fall of 2000, IBD constantly reminded investors
that the leading stocks and general market were showing classic distribution signals.
As for shorting the market, Livermore and Baruch made substantial profits from
short positions, as did ONeil in the early 1960s with Korvette and Certain-teed. Loeb
and Darvas were not very active in shorting, as they mentioned the general uptrend of
the market over time and the more dangerous risks involved in shorting stocks. ONeil
does not advocate shorting except for the most experienced traders. He also mentions
the increased risk involved and has proved that there are many great opportunities if
one waits for the next bull market.
Conclusion
Lessons from the Greatest Stock Traders of All Time

We have reviewed the profiles, strategies, trading rules, and similarities of the greatest
stock traders of all time. These traders were chosen due to their success in the market
that included many years and many decades of profits. The published works that detail
their strategies were all well received, and many became bestsellers.
As with most publications that use the greatest in their title, no matter which topic
or profession it might represent, there will be arguments for the ones included and for
the ones not included that many think should have been. The profiles chosen were based
on active stock traders that began their careers, or added to them, while trading for their
own accounts. They were also chosen as they covered each era of the market going
back to the 1890s.
Its always interesting to see how great performers can attain success dealing within
a similar environment over many different economic, social, political, and innovative
time periods. As mentioned in the Introduction, there have no doubt been many
successful stock traders over the years, and there have been many different strategies
and approaches to the market that have produced profitable results. Many individuals
are private traders who wish to retain their privacy. Others have been very successful
in managing money for others as professional mutual fund or hedge fund managers.
Probably the most notable and one of the most successful was Peter Lynch. Lynch
achieved incredible success as manager of The Fidelity Magellan Fund from 1977 to
1990. His publications One Up on Wall Street and Beating the Street are very good
books for stock traders to read and study. Of course, there is also Warren Buffett. He
has achieved fame and incredible wealth from his long-term investments due to his buy
and hold strategy and his management ownership positions in the many companies he
has invested in over the years.
It is, however, hard to argue with the innovative strategies and success that active
traders Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvas, and William
ONeil have had on the stock market. Each one, through determination to succeed,
learned what it ultimately took to stay on the profitable side of the market. Their efforts
are truly evidence that being detailed and hard working in their approach can pay
mighty rewards.
They proved that the stock market is not an easy place to find riches, but with
perseverance and hard efforts, its possible to succeed profitably over the long term.
We saw as we went along the time scale that more attention to detail was available in
their published works. Darvass book How I Made $2,000,000 in the Stock Market
illustrates charts of his best trades, showing his purchase and sell points. ONeils
publications, especially How to Make Money in Stocks, details his trading strategies
and rules with many charts of past winners. Investors Business Daily and his Web site,
www.investors.com are great resources that daily educate on how the market actually
works and illustrates many real examples to support his strategies.
The most amazing discovery one should gain from this book is that even though
these great traders conducted their activities in many different time periods on Wall
Street, they would ultimately discover many of the same basic skills, disciplines, and
trading rules that were required to achieve their success.
The main reason I decided to write this book was because I, like most, have made
almost every mistake in the book when it comes to stock trading. As I constantly studied
more and refused to give up, the best books I read are listed in the
Bibliography/Resource section at the back of this book. I kept coming back to sections
of these books and decided that it would be convenient to have one resource covering
all the basics from the very best traders. I also discovered the many similarities in their
approach to the market.
It was difficult to argue with their success, and I believed that if they could achieve
great results over that many years covering all those different market environments, then
there had to be some credence to their efforts. What was discovered is that the market
demands intense and serious attention to the details, only if you want to profit from it.
Hard work through observation and study, extreme discipline, patience, and the ability
to implement sound trading rules in order to gain emotional control is what all these
great traders discovered and led to their success.
Bibliography/Resources

Jesse Livermore

Lefevre, Edwin. Reminiscences of a Stock Operator. John Wiley & Sons, Inc. 1994.
Originally published in 1923 by George H. Doran and Company. Copyright 1993,
1994 by Expert Trading, Ltd. Foreword 1994 by John Wiley & Sons, Inc. This
material is used by permission of John Wiley & Sons, Inc.
Sarnoff, Paul. Jesse Livermore: Speculator-King. Copyright 1967 by Paul Sarnoff.
All rights reserved. Reprinted by permission by Traders Press, Inc. 1985.
Wyckoff, Richard D. Jesse Livermores Methods of Trading in Stocks. Windsor Books.
1984. Copyright 1984 by Windsor Books. Select material used by permission of
Windsor Books.

Bernard Baruch

Baruch, Bernard. My Own Story. Buccaneer Books, Inc. 1957. Reprinted by


arrangement with Henry Holt and Company. Copyright 1957 by Bernard M.
Baruch.
Grant, James. Bernard M. Baruch: The Adventures of a Wall Street Legend. John Wiley
& Sons, Inc. 1997. Copyright 1997 by James Grant. This material is used by
permission of John Wiley & Sons, Inc.

Gerald M. Loeb

Loeb, Gerald M. The Battle for Investment Survival. Excerpts reprinted with
permission of Simon & Schuster Adult Publishing Group. Copyright 1935, 1936,
1937, 1943, 1952, 1953, 1954, 1955, 1956, 1957 by Gerald M. Loeb. Copyright
1965, and renewed 1993, by H. Harvey Scholten.
Loeb, Gerald M. The Battle for Stock Market Profits. Excerpts reprinted with
permission of Simon & Schuster Adult Publishing Group. Copyright 1971 by H.
Harvey Scholten.
Nicolas Darvas

Darvas, Nicolas. How I Made $2,000,000 in the Stock Market. Lyle Stuart books
published by Kensington Publishing Corp. 1986. Copyright 1986 Lyle Stuart, Inc.
Copyright 1994, 1971, 1960 Nicolas Darvas. All rights reserved. Reprinted by
permission of Citadel Press/Kensington Publishing Corp. www.kensington-
books.com
Darvas, Nicolas. Wall Street: The Other Las Vegas. Lyle Stuart books published by
Kensington Publishing Corp. Copyright 1964, Nicolas Darvas. All rights reserved.
Reprinted by permission of Citadel Press/Kensington Publishing Corp.
www.kensington-books.com
Pas de Dough TIME, 5/25/59. Copyright 1959, TIME Inc. Select material reprinted
by permission.

William J. ONeil

ONeil, William J. How to Make Money in Stocks. McGraw-Hill. 2002. Copyright


2002 by William J. ONeil. Copyright 1995, 1991, 1988 by McGraw-Hill, Inc. All
rights reserved.
ONeil, William J. 24 Essential Lessons for Investment Success. McGraw-Hill. 2000.
Copyright 2000 by William J. ONeil. All rights reserved.
ONeil, William J. The Successful Investor. McGraw-Hill. 2004. Copyright 2004 by
William J. ONeil. All rights reserved.

Charts

www.bigcharts.com
www.investors.com (IBD Learning Center)

Resources Recommended for Daily Market Education

Investors Business Daily


www.investors.com
INDEX

Please note that index links point to page beginnings from the print edition.
Locations are approximate in e-readers, and you may need to page down one or more
times after clicking a link to get to the indexed material.

Note: Boldface numbers indicate illustrations.

A.A. Housman Company, Baruch, Bernard and, 29, 31, 32, 34, 43
AAII Journal 117
accumulation/distribution rating, 108
aggressive trading, 53
allocation of resources, 100
Amalgamated Copper, 33
American Depository Receipts (ADR), 27
America Online (AOL), 9495, 106, 118
American Association of Individual Investors, 117
American Power Conversion, 111, 111
American Spirits Manufacturing Company, 32, 33
American Sugar Refining, 3132
AMF, 91
Amgen, 95, 106, 112, 113
analysis, 42
annual earnings increases, CAN SLIM method (ONeil) and, 104105
Atomic Energy Commission (AEC), 36

Bank of Manhattan, 35
Barrons, 47, 77
Baruch, Bernard, 8, 9, 2945, 59, 60, 114, 117, 123, 125, 127, 128, 131, 132, 135,
136, 138
biography and early work of, 29
commodity investing and, 35
Crash of 1907 and, 3536
Crash of 1929 and, 37, 40, 42, 45
disciplined trading and, 4143
facts vs. rules of trading, 4445
fundamental analysis and, 43
Loeb, Gerald M. and, 4950
margin trading and, 2930
pyramiding strategy and, 3132
research and, importance of, 3334, 3841, 43, 4445
resources and information about, 141
short trading, 33
speculation, speculative trading by, 30, 3235
strategies of, 3845
WW I and public service, 3637
Battle for Investment Survival, The, Loeb, Gerald M., 4748, 123, 127
bear markets, 39, 61, 83, 98, 100, 113114, 129, 135
Beating the Street, 137138
Beckman Industries, 8687
Bethlehem Steel, 78
Box Theory, Darvas, Nicolas and, 70, 75, 76, 79, 8082, 8788
Boy Plunger, The (See Livermore, Jesse)
Brilund, 67, 70
Brooklyn Rapid Transit Co., 33
Brunswick, 91
bucket shops, 2, 3
Buffett, Warren, 48, 138
bull markets, 39, 53, 61, 98, 100, 129
buying stocks, rules for, 56, 115, 135

CAN SLIM method (ONeil), 86121, 90, 95, 133


accumulation/distribution rating and, 108
annual earnings increases in, 104105
charting and patterns of movement in, 108109
CupwithHandle pattern in, 109110, 110, 111
current quarterly earnings per share in, 103104
DoubleBottom base pattern in, 110111, 111
Flat Base pattern in, 111112, 113
fundamental analysis and, 103
institutional sponsorship in, 107
leader or laggard rank in, 105106
market direction in, 107
new products, new management, new price highs in, 105
relative strength (RS) rating and, 108
supply and demand in, 105
technical analysis and, 103
Canadian Pacific, 44
cash reserves, 4243, 55, 128129
Certainteed, 91, 92
changing market conditions, reacting to, 5051, 126
Charles Schwab & Co., 9495, 106, 121
charting, 17, 74, 90, 93, 96, 99, 113
CAN SLIM method (ONeil) and, 108109
CupwithHandle pattern in, 109110, 110, 111
DoubleBottom base pattern in, 110111, 111
Flat Base pattern in, 111112, 113
ONeil, William J. and, five-year winners, 117118, 118, 119, 120, 121
resources and information about, 143
Chrysler, 92, 93
commodities trading, 35, 44
concentration vs. diversification, Loeb, Gerald M. and, 55
confidence, overconfidence, 53, 62, 78
consistency, 57
Consolidated Stock Exchange, 30
Continental Rubber Company, 35
continuity of thought, 40
Cotton King, The (See Thomas, Percy)
Council of National Defense, Baruch, Bernard and, 36
crash of 1907
Baruch, Bernard and, 3536
Livermore, Jesse and, 6, 20
Crash of 1929, 135
Baruch, Bernard and, 37, 40, 42, 45
Livermore, Jesse and, 910, 20
Loeb, Gerald M. and, 48, 58, 63
margin trading and, 10
signals generated prior to, 10
Crown Cork and Seal, 91
Cuban missile crisis, 92
CupwithHandle pattern, 109110, 110, 111
current quarterly earnings per share, CAN SLIM method (ONeil) and, 103104
cyclical and seasonal markets, 20, 60, 99, 101, 126, 134

Daily Graphs, Inc., 93


Darvas, Nicolas, 56, 6788, 100, 101, 117, 123, 125, 127, 128, 130, 131, 133136,
138
biography and early work of, 6769
Box Theory and, 70, 75, 76, 79, 8082, 8788
Darvas Method and, 76, 79
disciplined trading and, 74, 77
fundamental analysis and, 69, 82, 83
How I Made $2,000,000 in the Stock Market by, 73, 138
loss analysis and, 77, 86
mistakes common to investors and, 71
money management and, 85
pilot buys and, 84
price analysis and, 71, 79, 82
research and, 7374
resources and information about, 142
risk management and, 7679
speculation, speculative trading and, 74
stop loss orders and, 7273, 81, 83, 8485
strategies developed by, 72
technical analysis and, 70, 82
TechnoFundamentalist approach and, 70, 76, 79, 8385
trend analysis and, 70, 74, 78, 80
Wall Street/The Other Las Vegas by, 73
database of stock market, ONeil, William J. and, 93
depressed economies, 3031
Diners Club, 84
disciplined trading, 1516, 4143, 5458, 74, 77, 98102, 126130
diversification, 4243, 55, 129130
dollar cost averaging, 17
DoubleBottom base pattern, 110111, 111
downtrends, 113114, 135
Dr. Facts (See Baruch, Bernard)
Dreyfus Fund, 89, 110
Dreyfus, Jack, 17, 102

E.F. Hutton & Co., 47


E.L. Bruce, 8485
earnings, CAN SLIM method (ONeil) and, 104105
economic activity vs. stock market activity, 3940, 39
economics, knowledge of, 15
education resources and information, 143
emotional control in trading, 11, 14, 35, 40, 4445, 52, 77, 125, 132
Enron, 99, 126
evaluating trades after the fact, 56, 98
exhaustion points, 62
experience, 125

facts vs. rules of trading, 4445


Fairchild Camera, 87
Fidelity Magellan Fund, 137
financial analysis, 43
Financial Chronicle, The, 29
Flat Base pattern, 111112, 113
Franklin Resources, 106
Freestone, Lee, 95
fundamental analysis, 9, 43, 52, 69, 82, 83, 93, 9697, 99100, 103
Genentech, 106
goal setting, 5556, 74, 96, 125
Graham, Benjamin, 48
Loeb, Gerald M. and, 48
Security Analysis by, 48
Great Bear of Wall Street (See Livermore, Jesse)
Great Western Financial, 91
groups of stocks (See industry groups)

Harvard Business School, 90


Hayden, Stone Co., 89, 92, 93
high/low analysis, 58
historical market research, 103
Hobcaw estate, Baruch, Bernard and, 38
How I Made $2,000,000 in the Stock Market, 73, 138
How to Make Money in Stocks, 59, 9596, 102, 138
How to Trade in Stocks, 1112, 90
Hayden, Stone & Co., 89, 92

impatience and impulse trading, 3


indicators, technical indicators, 97, 100
industry groups, 106107
manifest group tendency, 20
movement and trends in, 9, 1921
initial public offerings (IPOs), 105, 115116
inside information (tips), 41, 6869, 103, 127
institutional sponsorship, CAN SLIM method (ONeil) and, 107
intelligence, 53, 97, 126
Intercontinental Rubber Company, 35
intuition, 54, 74
Investor Magazine, 47
Investors Business Daily (IBD) and, 94, 102, 117, 127, 128, 130, 132, 138

Jesse Livermores Methods of Trading in Stocks, 12


Jones & Laughlin Steel, 69
judgment in trading, 4041, 54, 57, 62, 126
Kennedy, John F., 41
Kennedy, Joseph P., 4142
KerrMcGee, 91
Korvette, 93

leader or laggard rank, CAN SLIM method (ONeil) and, 105106


Lefevre, Edwin, 12, 92
lessons from great traders, 137139
line of least resistance, 19
Litton Industries, 8687
Livermore, Jesse, 128, 30, 31, 56, 59, 60, 74, 83, 90, 97, 102, 106, 117, 123, 125,
127, 128, 131, 133, 135, 136, 138
bankruptcy and preWWI days, 7, 11
biography and work history of, 12
bull market of WWI and, 78
Congressional committee on trading and, 8
Crash of 1907 and, 6, 20
Crash of 1929 and, 910, 20
cyclical and seasonal stock movements, 20
death of, 12
discipline in trading, 1516
dollar cost averaging and, 17
fundamental analysis and, 9
Great Bear of Wall Street fame and, 68
groups of stocks (See also industry groups) and, 9, 1921
How to Trade in Stocks by, 1112, 90
Jesse Livermores Methods of Trading in Stocks and, 12
mathematical analysis and, 17
organized trading system by, 45
probing strategy and, 56, 910, 2122
psychology of trading and, 1213
pyramiding strategy and, 56, 10, 2122, 25
Reminiscences of a Stock Operator biography of, 12
resources and information about, 141
Securities and Exchange Commission (SEC) and, 1011
short trading prior to Crash of 1929 and, 911
skills and traits of success in, 1315
strategies formulated by, 35, 1328, 13
strategies that apply today, 2428
volume and trend analysis and, 1719, 2428, 25
Loeb, Gerald M., 17, 4765, 75, 79, 83, 100, 102, 117, 123, 125, 128, 129, 130, 131,
133, 134, 135, 136, 138
Baruch, Bernard and, 4950
Battle for Investment Survival, The by, 4748, 123, 127
biography and early work of, 4749
cash reserves strategy and, 55
change and importance of reaction to, 5051
Crash of 1929 and, 48, 58, 63
cyclical and seasonal markets, 60
disciplined trading and, 5458
diversification vs. concentration theory of, 55
evaluating trades after the fact and, 56
fundamental analysis and, 52
Graham, Benjamin and, 48
money management strategies of, 62
price analysis and, 58
psychology of trading and, 5152
pyramiding strategy and, 6061
resources and information about, 141142
return goal setting and, 5556
rules of trading by, 5865
selling stocks and, rules for, 6264
shortterm investing and, 50
short trading and, 6465
speculation, speculative trading and, 4749
strategies developed by, 4965
trend analysis and, 4849, 50, 5961
valuation analysis and, 61
volume and trading signals, 5354, 5960
longterm investing strategies, 48
long trading, 3
Lorillard, 84, 85
loss analysis, 77, 86, 91, 9899, 123124, 127128, 131132
losscutting strategy, 59, 64, 102103, 131132
Louisville & Nashville Railroad, 3334
luck in trading, 98
Lynch, Peter, 137138

manifest group tendency, 20


management of company, 61
CAN SLIM method (ONeil) and, 105
margin trading, 2930, 58, 93
Crash of 1929 and, 10
market direction, CAN SLIM method (ONeil) and, 107
market orders, 101
mathematic skills, 15
mathematical analysis, 17
McKinley assassination attempt, 33
memory requirements, 15
mistakes common to investors, 71
mob psychology, 5253
money management strategies (See also cash reserves), 62, 85
Morgan, J.P., 6, 40

Netease.com trade, 2728, 27, 28


new products, new management, new price highs, CAN SLIM method (ONeil) and,
105
Northern Pacific RR, 34

ONeil, William J., 18, 56, 89121, 123, 125, 127, 128, 129, 130, 131132, 133, 134,
135, 136, 138
24 Essential Lessons for Investment Success by, 9596, 102
accumulation/distribution rating and, 108
biography and early work of, 8993
buying rules of, 115
CAN SLIM method and, 90, 95, 96121
charting by, fiveyear winners, 96, 117118, 118, 119, 120, 121
cyclical and seasonal markets and, 101
Daily Graphs, Inc. and, 93
database creation by, 93
disciplined trading and, 98102
fundamental analysis and, 93, 9697, 99100, 103
goal setting and, 96
historical market research and, 103
How to Make Money in Stocks by, 59, 9596, 102, 138
indicators, technical indicators and, 97, 100
Investors Business Daily (IBD) and, 94, 102, 117, 127, 128, 130, 132, 138
loss analysis and, 91, 9899
losscutting strategy of, 102103
margin trading and, 93
market orders and, 101
pivot point analysis and, 9192
pyramiding strategies and, 9091, 92, 114115
relative strength (RS) rating and, 108
research and, 8993
resources and information about, 142
short selling and, 92, 116
strategy developed by, 90
Successful Investor, The by, 96, 102
technical analysis and, 93, 9697, 103
trend analysis and, 92, 100101, 103
William ONeal Direct Access (WONDA) database, 93
The Battle for Stock Market Profits by, 59
objectivity, 53, 74
observational skills, 15
Omnivision Technologies, Darvas Box Theory and, 8788, 88
One Up on Wall Street, 137138
organized trading, 4
originality of thinking, 53

P/E ratio, 51, 69, 104


Panic of 1903, 34
panics, 31
paper trading, 52
patience and poise, 14, 15, 7475
PicNSave, 94, 105, 115
pilot buys, Darvas, Nicolas and, 84
pivot points, 9192, 133134
price analysis, 58, 61, 71, 79, 82
CAN SLIM method (ONeil) and, 105
Price Company, 105
probing strategy, Livermore, Jesse and, 56, 910, 2122
Proctor & Gamble, 90
profits, 5, 68
Program for Management Development (PMD), 90
psychology of trading, 1213, 19, 36, 40, 41, 5152, 53, 74
pyramiding strategies, 56, 114115, 134
Baruch, Bernard and, 3132
Livermore, Jesse and, 10, 2122, 25
Loeb, Gerald M. and, 6061
ONeil, William J. and, 9091, 92

Qualcomm, 95, 106, 119


quality of stocks, 61

rallies, 114
recessions, 100101
relative strength (RS) rating, CAN SLIM method (ONeil) and, 108
Reminiscences of a Stock Operator, 12, 92
research, 3334, 3841, 43, 4445, 7374, 8993, 97, 107, 124, 127, 128, 130
facts vs. rules of trading in, 4445, 44
reserve accounts (See cash reserves)
resistance points, 12, 1819, 79, 134
resources, 141143
return goals, setting, 5556
return on equity (ROE), 104
rewards, 57
Rich Mans Panic of 1903, 34
risk management, 57, 62, 7679, 129
Roosevelt, Theodore, 33, 36
Rubber Goods Manufacturing, 3435
rules common to great investors, 130136
Ryan, David, 95

seasonal stocks, 20
Securities and Exchange Act, 1011
Securities and Exchange Commission (SEC), 1011, 127
Security Analysis, 48
selling stocks, rules for, 6264, 7071, 135
short selling, shorting, 3, 911, 17, 18, 33, 50, 6465, 85, 92, 116, 133134, 136
sideways markets, 129
skills and traits of success for investors, 1315, 53, 9698, 124126
economics, knowledge of, 15
emotional balance, 14
patience and poise, 14, 15
timing, 14
Soo Line, 35
speculation, speculative trading, 30, 3235, 4749, 74
stock market activity vs. economic activity, 3940
stock splits, 105
stop loss order, 7273, 81, 83, 8485, 101
Stratasys Inc., 2427, 25, 26
strategies of great traders, 123136
study (See research)
studying the market (See research)
Successful Investor, The, 96, 102
Sun Microsystems, 95, 106, 120
supply and demand, CAN SLIM method (ONeil) and, 105
Syntex, 92, 93, 105

tape reading, 17, 51, 58, 90, 102


tax considerations, 5758, 76, 100, 130
technical analysis, 70, 82, 93, 9697, 103
TechnoFundamentalist approach, Darvas, Nicolas and, 70, 76, 79, 8385
Texas Gulf Producing, 70
Texas Instruments, 86, 87
Thiokol, 8586
Thomas, Percy (The Cotton King), 67, 127
timing of trades, 4, 14
tips (See also inside information), 5, 30, 41, 44, 103, 6869
trend analysis, 1719, 2425, 25, 4850, 5961, 70, 74, 78, 80, 92, 100101, 103,
107, 132133
24 Essential Lessons for Investment Success, 9596, 102

U.S. Surgical, 109110, 110


Universal Controls, 8586
Universal Match, 90
Utah Copper Company, 36

valuation analysis, 61
volume and trading signals, 1719, 2428, 25, 5354, 5960, 106107, 135

Wall Street Journal, 47, 94, 95


Wall Street/The Other Las Vegas, 73
William ONeal Direct Access (WONDA) database, 93
William ONeil & Company, 93
Wilson, Woodrow, 8, 36
WONDA database, 93
work ethic for investors, 124
World War I, 78, 36
WorldCom, 99, 126
Wyckoff, Richard, 12

The Battle for Stock Market Profits, 59

Zenith Radio, 87
About the Author

John Boik is a controller and the owner of Stock Traders Management, Inc., a private
money management firm. An active trader and former stockbroker, Boik writes the
popular and influential column The Stock Market Weekly Report for Traders Press.